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Financial Sense Newshour

The BIG Picture Transcription

May 31, 2008

Part 1

Get Ready For: $150, $200 & $300 Oil

JOHN: Aaah. You know how you sit there and think about the neat things that happened during the days of your youth. You know, you sit there and think about the days on the beach or the neat things you did; I was sitting hear dreaming of $50 oil, Jim.

JIM: A long, long time ago in a galaxy far, far away.

JOHN: Not on this planet! I actually keep right here a charge slip from a gas station right at the top of Portola Drive in San Francisco when I was a student at San Francisco State for – I think I filled up my whole tank for $2.50. I keep that kind of as a…

JIM: What was that – that was, what, 25 cents a gallon back then?

JOHN: Something like that. Exactly. Right. And that was back about 1969, 1970 – I remember those days. Those were good days. You know, the energy debate, by the way, continued to dominate the headlines this week as consumers faced record gas prices. By the way, it is beginning to effect the prices in other industries and their products. This week the government reported on Thursday a major drawdown of oil and gasoline inventories; and crude oil stocks fell by 8.9 million barrels; gasoline stocks by 3.3 million barrels. And whether you’re looking at oil or gasoline inventories they are trending downward and have fallen below where they were five years ago. Oil is hovering right now at close to $130 a barrel – and Jim, you predicted oil would hit 125 by the end of the year and it seems to have happened six months early; but that happened too when you were doing $50 a barrel, I remember, it happened six months early. So I guess it’s better we give people an open time frame than no time frame at all. Your new prediction now is 145 – by the end of the year, is that what we’re looking at?

JIM: Yeah, by this winter or so. You know, it could be December, January but 145 at least in the next six months.

JOHN: Okay. So 145 in the next six month bracket. What we’re going to do here today on the first part of the Big Picture is to lay out the case for why we believe oil is headed to higher levels of 150, then 200, then probably 300 dollars a barrel. There is so much noise out there right now when you’re trying to look at these trends and you listen to a lot of the talkies – and especially the evening news or CNN types – that this is all obfuscating the issue. So we have to begin with the facts of why we believe prices are headed much, much higher.

JIM: Well, I don’t want to rehash some of the broader macro pictures, we’ve already covered that in past topics here over the last month or two. We’ve covered the lack of discoveries to the peaking of the giant oil fields. What I want to explain today is the reason for the spike recently that we’ve seen since the beginning of the year and why oil prices are headed for that 145, 150 range. I mean if you look at a chart of oil in this decade, when oil prices began to take off in 2002, after hitting a low of around $17 after 9/11 and then of course the recession of 2001, oil prices headed up to $30 a barrel in 2002 and around $56 a barrel in 2003. So between 2003 and 2006, we began trading in that 50 to 70 dollar range. And remember, back then the media was blaming rising prices on a litany of events from the war, the weather, the dollar, and of course it’s now all being blamed on speculators. All of this was mostly noise. Underneath the noise, the energy dynamic is shifting and few people picked up on this. [4:02]

JOHN: If you remember, all along you hear the word ‘bubble.’ It’s always been a bubble. It’s a bubble this, it’s a bubble that. Well, listen must be the biggest bubble in history if anything.

What do you think caused the price rise? Can we actually in all honestly tack it down to something as simple as supply and demand.

JIM: I mean you hit this nail on the head. And that’s the thing they’re talking about, all of this: “Well, it’s the dollar;” “it’s speculators.” But they’re not talking about the supply and demand issues. I mean between 2004 and 2006, we began to see the exhaustion of conventional oil production with the peak in conventional oil production which was reached in May of 2005 at roughly around 74.3 million barrels a day and it has fallen ever since. Now, do you ever hear them talking about that? I don’t think so. [4:48]

JOHN: Given the fact that we have such a shortfall, how are we currently meeting oil demand because we’re talking about 87 million barrels a day and a shortfall of two.

JIM: Well, we’re not meeting demand and that’s why prices are rising. Demand is around 87 million barrels a day, supply is at 85 million barrels a day; and that’s why we’re sitting here talking about $130 oil. However, here’s a key. What happened when oil prices rose from 30 to 70, it brought onstream unconventional oil and made that oil economic. So between the peaking of conventional oil which began to unfold between 2003 and 2005, non-conventional oil began to come onstream such as biofuels, coal-to-liquid, gas-to-liquids and tar sands. So since 2004, nearly 90% of the growth of new oil capacity that we have seen has come from biofuels and synthetic oil and natural gas liquids. The problem is that these new non-conventional sources aren’t scaleable. I mean many of these sources of new supply are facing technical issues, political challenges. Look at for example, here in the US, corn-based ethanol. It’s constrained by the pressure that it is putting on food prices and water. Not only is it constrained but also you have to take a look at energy return on energy invested, and it’s very low for ethanol. [6:26]

JOHN: You’d better explain that term so we know what we’re dealing with.

JIM: If you take a look at –whether you’re looking at ethanol or you’re looking at tar sands, just like in the investment business we look at return on investment, in the energy business there’s something called ‘energy return on energy invested.’ If you take a look at one barrel of ethanol equals about 0.61 barrels of oil in terms of energy produced; or one barrel of natural gas liquids equals about 0.73 barrels of oil. So you’re getting less energy for the amount of energy invested. I mean it takes a lot of energy to produce a barrel of oil out of the Canadian tar sands. It takes a lot of energy to produce a barrel of ethanol. And so we’re back to scalability. I mean what are you going to do? Are you going to go from 25% of our corn crop to 75% of our corn crop? It’s not going to work – and that’s what I’m talking about in terms of the ability to use an alternative fuel and scale it up. Yes, there are large reserves in the tar sands but are you going to be producing 10 million barrels a day? No. You’re going to run into bottleneck problems, you’re going to run into problems with natural gas to heat the bitumen, you’re going to run into problems with water issues. And that’s what we’re starting to see in the tar sands – they’ve already hit constraints on access to energy and water. [7:55]

JOHN: One of the things that you’ll always hear from critics is all of these new discoveries – it’ll go like this: “Oh, we really don’t have an energy problem; we really just have all of these discoveries out there. We hear about the Gulf of Mexico, recently in Brazil, Angola – new fields in Saudi Arabia and that would theoretically alleviate this and that is why is all hooey.”

JIM: No. Not really. It’s not going to alleviate it because here’s the problem: we’re consuming around 32 billion barrels a year while we’re discovering about 10 billion barrels. So OPEC’s spare capacity – if you look at a chart has fallen from the beginning of the decade where it was around 8 million barrels a day, now it’s less than two million barrels a day and some even question that number. And also, these new projects are falling behind schedule due to growing global shortages of materials, manpower. Take a look at oil service inflation where you had one company like Petrobras that tied up 80% of the world’s deep offshore rigs; and you’ve seen rates for these deep, offshore rigs go from $70,000 a day to almost $700,000 a day. So this is just one of the problems that they’re running into as you get into this exploration that a lot of these companies – and it’s not just even materials, it’s personnel. There is even talk that the majors may buy service companies not just to get their business but also to get access to the personnel as people in the industry are now set to retire and there hasn’t been an influx of new people coming into the industry. So we have personnel shortages. [9:32]

JOHN: I guess what this all portends is the fact that for the short term anyway here, just ramping any kind of production, supply or otherwise, does not really sound promising at all. There is an interim period I would say 10 to 15 years before we’re going to get back to where we were before.

JIM: And you know, it’s going to get worse as we head towards that crisis window that we’ve been talking about between 2009 and 2012 which was highlighted by the International Energy Agency (IEA) last year. In fact, the IEA as we talked about in The Decline of the Giants, is now conducting its own review of the world’s giant oil fields. They’re looking at the top 250 because they’ve been issuing these reports over the years saying, “Okay, demand is growing at a factor of x,” and then they’ve always just assumed then supply will grow at a factor of x. Well, guess what? Supply isn’t growing. So they’ve had to go back to the drawing boards and look at their own assumptions. And hopefully we’ll get that report out this summer and when we do we’ll try to get officials to come in and comment what that finding was. [10:41]

JOHN: Well, if we had to outline why we think it’s really going to get worse going forward, we keep talking about not just the crisis window but this bottleneck, and it’s important for people to understand this, it’s a technological bottleneck as well as an economic one. What would this look like?

JIM: One aspect you have to look at is the demand side where we have repeatedly pointed out that the fastest [growing] area of demand is within OPEC itself

where the price of energy is subsidized. I mean if you’re Iran or Saudi Arabia and you’re paying 45 cents for a gallon of gasoline, you don’t know about the price of oil being close to 130 because you’re not seeing that price reflected in the price you pay in your own country. So the fastest growth in consumption is occurring within OPEC. As OPEC consumes more of what it produces it will have less oil to export. In fact, there are people talking about peak exports now. It is one reason OPEC production has been flat. In fact, several countries that were once exporters within OPEC have now turned into net importers of oil. If you take a look at the UK, which at one time was a large exporter of oil because of the North Sea, now the UK and Indonesia which both exported over 1 million barrels a day, they’re no longer exporting oil, they’ve become net importers. So between these two countries alone, John, you’re talking about the loss of nearly 2 million barrels a day of exports to countries that needed it.

More importantly, you take a look at Russia which recently reported in April of this year that their production peaked last year. Production in the first quarter is down this year. And worse for the US, PEMEX of Mexico which is the third largest supplier to the United States reported that they experienced probably the biggest field drop in 12 years. Mexico’s oil production fell 13% to roughly about 2.8 million barrels a day in April and their exports to the US dropped 14% to roughly 1.4 million barrels a day. It also announced it would be further reducing exports so it could refine more of its own oil. This gets back to the point that those that produce it are consuming more of what it is they produce, so therefore as their production declines they need to husband that resource more for their own country. If you take a look at Saudi Arabia’s oil production it has fallen from roughly 8.9 million barrels a day in 2006; last year, Saudi Arabian oil production fell 8.5 million barrels a day. You also take a look at with oil prices at $125 a barrel – just think of Russia, OPEC or Saudi Arabia that these countries can just flip a switch and the oil taps will begin flowing. And the reality is that they can’t. If they could with prices this high, the prices would drop tomorrow. They’d just flip the switch and we’d see millions of barrel of new supply come onto the market. The problem is they can’t flip a switch. So we now have world GDP growing at roughly 4% and you have oil supply growing at 1%; so the only way that you get demand and supply to balance is for demand to fall so that it becomes in balance with what you’re able to produce or supply. And the only way that happens – and politicians don’t like this – it’s higher prices. That is why oil prices are heading to 145.

You could see supply fall or we could get disruptions such as Nigeria and then that is where you get these price spikes to 200 that people like Goldman Sachs are talking about. And God forbid, if the Gulf of Mexico gets hit by severe hurricanes this summer, then you could $175 oil because there is not the excess of supply –and especially in finished petroleum products such as gasoline and diesel. I mean there is a shortage of diesel right now because of what’s happening in China. China’s small teapot producers aren’t producing as much diesel; you’ve also had the earthquakes in China, so now China is going in the open markets and competing with the US for refined products. It’s one of the reasons for example diesel prices here in California are $5.10 at the pump – I think it just went up today I think one of my employees was telling me. And also in the bay, if you have a power boat, prices are close to $6. So we just don’t have the capacity that even existed or the surplus of refined products the way we did in 2005 when Katrina and Rita hit. [15:29]

JOHN: What you’re talking about is already starting to happen as a matter of fact. You looked at how demand is down in the United States and so the market is adjusting to the demand – first of all, go to the used car lots, watch the trade-ins now. I did this last weekend here in our part of the country, and sure enough, all the trade-ins are the SUVs, the heavy duty pickups that people don’t need – all of the gas guzzlers. People are working four days instead of five – they’re rearranging that so that the commute distance is less. They’re changing to public transportation – all sorts of things which maybe to a certain degree from an environmental standpoint we should have been doing much earlier on that but this is going to be painful is the way we go; consumption is down; SUV sales are not only down but people are finding in some cases that people have what you would call a negative asset, meaning that they can’t unload the gas guzzler for at or above what they owe on their notes, which means they’re going to sell a car and still owe x amount of dollars on the whole thing. But overall, Americans are reducing the dollars that they drive. [16:30]

It’s not speculators. Speculators have nothing to do with the price of oil. There is 85 million barrels and the demand is greater than 85, so supply and demand are in very critical balance. And so you put a speculator in there, what can they do? They can’t do anything, you know. And they talk about the value of the dollar; get the value of the dollar up and it’ll make oil prices go down. That too is a myth.

The very familiar voice of T. Boone Pickens there. Obviously, it’s supply and demand, dummy!

JIM: This is funny because the demand destruction in my opinion has much further to go. If you have GDP growing at 4% globally and supply is growing at one percent, something has got to give, so that’s why I think this demand destruction – the only way it’s going to be balanced is for demand destruction to occur in OECD countries. And so that’s why I think prices are heading much higher despite the talking heads calling it a bubble, a bubble, a bubble. I mean they call it every single week. Well, if it’s a bubble, where is the surplus?

And so despite all of the complaints by government officials against the market, John, the free market is doing its job of bringing demand into balance with supply. I mean there is nothing government can do to stop this crisis. If anything, government policy could drive prices even higher. [17:48]

JOHN: You mentioned before how the US has no energy policy and I think listening to all of the testimony before Congress for the last two weeks which we’ve done here, I would tend to agree with that. More importantly, Congress has actually worked overtime to reduce the supply and they’re considering the latest bill, the Warner-Lieberman bill to begin caps and credits as well, which will make energy more expensive. And this is the whole global warming issue of trying to reduce CO2 emissions; but we’re going to make energy more expensive now at a time when it’s already expensive. Let’s listen to some of the debate from last week’s oil hearings (and we’ll have to throw in one of our favorite cuts here as well from a couple of weeks ago) then you’ll understand why we’re headed for an energy crisis and higher oil prices.

We put a moratorium in place about 30 years ago for the outer continental shelf in America when the price of oil was $7 a barrel. Now it’s over $127 a barrel and you’d think that Congress would finally wake up and learn that it’s part of the problem and it needs to be part of the solution by opening up more of America’s natural resources to development so we can increase supply here at home rather than have to continue to depend on imported oil from our enemies.

Right, and you tried, but the best we got is stopping delivery to the SPR, but I can’t imagine you think that’s going to have much of an impact on fuel prices,

It’s miniscule. 70,000 barrels a day in a world economy that consumes 85 million barrels a day. It’s a thimbleful. It’s trying to bail the boat with a thimble.

We’re are dependent on foreign oil and our dependency on foreign oil has caused us security problems in regards to our international concerns, it has caused us environmental problems with global climate change and we’re now seeing how it is causing us economic problems. The people of Maryland and around this nation are hurting today because of the cost of gasoline at the pump. It is affecting our lives in a very dramatic way.

SENATOR: How many years will it take us to be energy independent under our current policies, where we won’t have to import foreign oil?

WITNESS: I don’t think we will be energy independent

SENATOR: And you don’t think that’s a worthy goal?

WITNESS: I think reducing our dependence on the rest of the world is a hugely worthy goal. Yes.

SENATOR: But you’re satisfied with current policies?

WITNESS: No. I’m not satisfied with current policies. There are a lot of policies that need to be made to enhance the ability to produce natural gas in this country, which is a clean fuel. I think there are a lot of policies that need to help us invest more in the oil business in this country. I think there are a lot of policies need to be done to invest in the coal business in this country and I think in renewables. We need the removal of the barriers to investment, not incentives…

SENATOR: I hear your verbal support for these types of programs, I don’t see the energy by the leadership at the table today in helping us develop an energy policy for our country that’s in the best interests of our national security, environment and economy.

The 36 billion dollars that your company reported in the first three months of this year were drawn directly from the exorbitant amounts of money Americans are paying at the pump and it’s wrong. And as we’ve heard from senators here today just doesn’t seem fair.

And the suggestions that I don’t want to hear that we’re going to keep drilling where we already know folks in our district particularly in California do not want allow for more drilling along our coast.

SENATOR: I can guarantee to the American people because of the inaction of the United States Congress ever increasing prices unless the demand comes down. And the five dollars will look like a very low price in the years to come if we are prohibited from finding new reserves, new opportunities to increase supplies.

SENATOR: And guess what this liberal will be all about. This liberal will be all about socializing – be about basically taking over and the government all of your companies. [21:58]

JIM: You know, I think those elected to Congress are probably more uninformed today than the last oil crisis in the 1970s. I mean if you take a look at what happened in the 70s, we were faced with gas lines, prices that quadrupled. We took three steps to resolve the issue: one was to increase energy supplies which you just heard Congress is not even looking at – they want to reduce supplies; the second step was to reduce demand that produced significant and long lasting results; and the third was to set up a strategic petroleum reserve – in other words, we never wanted to have somebody embargo us again and put us in that kind of a position. So in order to – if you take a look at the first step – in order to increase oil supply, we passed the Trans-Alaska Pipeline Authorization Act which authorized the completion of a pipeline to carry oil from Alaskan oil fields to ports for supplies in the US. And among other things the law turned aside all the legal challenges primarily coming from environmentalists to complete the pipeline. Congress passed fuel efficiency standards; they created incentives, for example, energy conservation. The Alaskan oil pipeline added 2 million barrels of crude supply and then if you take a look the auto efficiency standards, reduced demand – and you remember, John, when they reduced the speed limits to 55, that reduced consumption by 2 million and so we saw a net 4 million barrels savings that reduced our demand on foreign oil by 4 million – by 1) increasing supply by 2 million; and 2) reducing demand by 2 million. And we can do that today – I talked about the speed limit to 55. You also saw power plants that were burning oil convert to coal. Crude imports from OPEC fell sharply after 1979 and demand was actually lower until you got to about the mid-80s than it was in 1973.

So you contrast to what we’re doing today where you just heard from our Congress leaders, they want no new drilling. In fact, one environmental group that got the polar bear put on the endangered species – even though the population has increased five-fold – they gave a press conference and they plan to use the Endangered Species Act to shut down existing production off the coast of California and drilling in the Gulf of Mexico. So the only solution that they’ve come up with so far is the windfall profits tax which will make us more dependent on foreign oil. And unfortunately, Congress is still stuck on stupid. [24:44]

JOHN: Well, there is now talk about how this is all due to speculators. That’s the latest reason for the bubble. As you said earlier, each time we’ve gone to a new – I call it a notch, sort of like a stairway so you’re going up these notches of oil prices and at one point it was the war, and then something else – so there are proposals now since it’s allegedly due to speculation to limit investors ability –or at least to place limitations on investors – to invest in this area. It’s beginning to look like the US is becoming less of a safe haven for capital. And while this is a problem in terms of speculation affecting the market – on the other hand, this could also affect what investors really think about future investments in the United States. There are now reports that money is leaving the US, especially given the very hostile talk towards business by a number of the presidential candidates. It’s like they’re determined to kill this thing – “it’s not dead, let’s make sure it’s dead.”

JIM: If they try to stop investors or penalize them, what they’re going to do is drive money offshore. And we know that there are new oil bourses that have now come into play, and those oil bourses are going to begin to compete with the US. We’ve got one in Dubai, we’ve got one coming up in Iran. There’s talk of Russia setting up an oil bourse – especially since they’re the largest exporter in trading oil in rubles. You’ve got Venezuela talking about setting up a bourse in Caracas. So if we pursue this route, the US will lose control over oil pricing and prices will be dictated to the US by foreign powers. Oil is going to be no longer priced in dollars, which will really hurt us especially if the dollar is going down. It’s like if you take a look at this price spike in oil, it’s gone up almost five-fold in the United States but for foreign investors like in euros, it’s only gone up three-fold because their currency has appreciated against the dollar. Well, imagine if we lose pricing of oil in dollars and have to pay for oil in rubles, euros or yen then it’s really going to drive home the damage to the US. [26:59]

JOHN: Last year in a piece we did here on the program called the new oil order, you laid out how the oil markets were changing into a totally new paradigm and attempts by Congress to stifle investment demand may actually accelerate the loss of control over the markets by the United States and the perhaps push the US into the crisis window that we’re predicting. This topic really right now, Jim, I think we should revisit this so let’s go back and do an encapsulated review of what it is and how it affects the situation now.

JIM: Well, I don’t want to spend a lot of time on it, but in a nutshell, when the United States got embargoed during the Yom Kippur war for our support of Israel, in 73 and 74 there was like a six-month embargo. And what happened is the United States began to look for other sources of secure oil, other than OPEC because we didn’t want to get embargoed. So what we began to do is go to new suppliers, Mexico was one, Canada became more critical and other countries, and we began to buy oil from these new sources. These new sources began to underprice oil from OPEC, so what they were doing is undermining OPEC’s pricing ability. So that was number one.

Number two, prior to the embargo, most oil was tied up in terms of long term contracts – usually a country would sign an agreement, “we’re going to supply oil to you at x amount with an inflation factor over a 10-year period.” What happened is with the new suppliers we began to initiate short-term contracts. In other words, these contracts weren’t tied up long term. Secondly, as these new sources of supply coming from, well, number one we had the North Slope kicking in, we had the North Sea kicking in, supplies from Mexico (Cantarell had been discovered in the 70s) – and as these new supplies came in, they began to be priced in the short term end of the market on these exchanges like the NYMEX. And so what happened is we shifted the pricing of oil from these long-term contracts to the spot market and short-term contracts; and we were able (with a new source of supply and then changing the markets) to control these markets. And that’s what has existed. We created this virtual oil pool, so that as in the case of Katrina and Rita, when there was a shortage as our refineries were knocked out because of the hurricanes we could go into the futures market or the spot market and buy supplies of gasoline and diesel and within two or three weeks the stuff was arriving on our shore.

Well, if you look at what is happening now is, with Russia spearheading this, a lot of the oil market is being taken off line. So in other words they are shrinking the oil pool. For example, when you had Venezuela that used to export let’s say 1.7 million barrels a day, now they’re down to 1.4 million barrels a day, they take that 300,000 barrels they used to sell to us and now they’ve signed a long term contract with the Chinese. So what is happening now is oil is reverting back to its old pricing structure as in the 70s as it reverts more to long term contracts. And that’s what we’re in real danger here of watching by not increasing an alternative supply, this is going to make us more vulnerable because you take a look at the 10 countries we get our imports from – Canada being number one, Saudi Arabia, Mexico which is in decline, Algeria, Nigeria, Russia, a lot of OPEC countries – it makes this country extremely vulnerable and especially if we’re not doing anything to increase the supply. What are we going to do? Everybody talks about alternatives – that’s a great idea but you know what? We’re about 5 to 10 years away from those alternatives. But in the meantime, trucks, airplanes, boats trains – all of these transportation systems run on liquid fuels. What are you going to do in the meantime? There’s where the real problem lies. [31:14]

JOHN: So if I were to summarize this whole thing here, oil prices are headed higher to about 145-150 dollars a barrel by the end of the year – somewhere in there. As the markets bring demand into balance with supply, we expect higher prices next year. I think that’s the only thing that’s reasonable out of that. Congress is fiddling while the country burns so far, so we’re already seeing the front line of the storm right now; that’s the squall line as I call it. But next year it really gets much, much worse; that’s the end of the Oreo filling we were talking about earlier in the year and we begin to hit the crunchy other side. And not until this crisis merges into the perfect storm will then government really begin to attempt to solve this problem. Now, when they wake up we’re going to be knee deep in to the storm which also makes me nervous because you know one of my fundamental rules of thumb: if they didn’t see it coming, they won’t know what to do when it gets here. Okay! And so far, the Congress is demonstrating that to be true. So our listeners need to understand they need to build their own lifeboat right now – I guess that is why we’re talking about this here because when the ship sinks you don’t want to be scrambling around looking for a life preserver. When we come out of the backside of this paradigm – we pass through it – life as we know it is going to be changing in the United States and that’s why we do this program because you as the listener or the investor need to begin thinking about changes in your own lives. Can we have a happy ending to this story, by the way?

JIM: If there is a silver lining in this story it is that this crisis is going to accelerate the search for alternatives – that’s going to be a good thing. And on the manufacturing side, production will be moving back to the US; in other words, we’re going to see a reverse of globalization and you’re already seeing signs of this in the trade deficit figures where our exports are rising. And I think you’re going to see though on the positive side, a lot of these long lost jobs are going to be coming back home. One of my favorite economists is a gentleman by the name of Jeff Rubin at CIBC, and he recently wrote a piece about how globalization is reversible as high energy prices impact transport prices; he talks about the cost of these standard 40-foot containers that you see. This is going to blow your mind – the shipping cost of these 40-foot containers has tripled since 2000. And if oil prices head to 200, Jeff believes the price will double again. I mean it takes roughly about 4 weeks to ship cargo from China to the west coast of the United States. In 2000, it cost $3,000 to ship a 40-foot container to the US; today it costs $8,000 a container. And if oil rises to $200 the price will almost double to $15,000. So, for example, steel production – where Chinese steel exports to the US have fallen by 20% last year. A lot people have commented, “Well, that’s because of a slowing economy.” Not true. Last year steel production, as Jeff points out, in the United States was actually up 10%. So bringing production back home is becoming a reality. And as Jeff Rubin states, “In a world of triple-digit oil prices distance costs money. And while trade liberalization and technology may have flattened the world, rising transport costs will once again make it rounder.”

By the way, Jeff is not the only person who has talked about this. Matt Simmons in many of the speeches he has given is also talking about reversing globalization; in other words, when the cost of transportation goes up – and remember, a lot of these transport ships that were built to handle these containers were designed to travel at high speeds, and of course at higher speeds you’re burning more fuel. As the price of fuel rises – on this Friday we’re looking at almost $128 a barrel and when it goes to 150 or $200 you’re talking about 15,000 a container, that’s starts to become significant; and it’s one of the reasons why, for example, Airbus is considering building a new plant here in the United States; it’s one of the reasons that Honda, which is coming out with a new jet in 2010 – a more fuel efficient, light jet for shorter distances – it’s going to be manufactured in North Carolina. So you’re going to see a lot of this and that’s going to be the good news assuming that our presidential candidates don’t start a trade war. [35:51]

JOHN: If we talk about the disconnectedness of Congress in this case – with some amusement I’m watching the Warner-Lieberman bill go through which is basically trying to get the United States to reduce its greenhouse gas emissions, and the way it’s doing this is a cap-and-trade program designed to make energy more expensive; to provide a penalty to industries which produce CO2. And that’s what it’s guaranteed to do by most of the analysts that look at it. Now, why are we making fuel more expensive at a time when fuel is becoming more expensive by itself. And you watch the behavior of people: they’re changing the vehicles they do, they’re changing the commutes, they’re changing how they use the fuel – which theoretically was the whole purpose of discussions all the way back to Kyoto as well. But here you have two different things running at cross purposes so at a time when fuel is becoming more expensive, Congress wants to make it even more expensive on top of that! And it’s going to take some time before reality catches up with the whole thing there.

And by the way, it was also mentioned that there have been a number of studies done which show that this bill, while it will reduce CO2 output, that will be offset by what China and India are doing one for one. So much pain to the US economy, no net change in the CO2 in the world’s atmosphere.

You’re listening to the Financial Sense Newshour at www.financialsense.com. [37:12]

Ticking Time Bomb: Not If, but When

JOHN: I really always relish these grand pronouncements as we go through wave after wave of crisis here. We went through the credit crisis, we’ve gone through the Bear Stearns issues; you can see these little bumps over the last seven or eight years and at that point everybody proclaims, “Everything over, it’s well-managed, go back to your dinner tables, we’re okay.” But in reality there’s a lot more to come ahead. We’re not through this and these aren’t just isolated little bumps that have been handled, in reality they’ve been managed but that’s about it at best.

Where do you think we’re going to head as we go into this crisis scenario?

JIM: It’s gone from the subprime market, it’s filtered all the way into the Alt-A market and then the other thing that we’re starting to see is credit card delinquencies, auto loan delinquencies, and something in the financial area that I think is just waiting to happen – I think it’s not a question of ‘if’ but a question of ‘when’ – and that is credit default swaps which could be the next big one or the big headliner. Delinquencies on credit cards – they’re already talking about that. It hasn’t gotten real big but it’s worsening as the economy slows down and as people get laid off and as costs go up and people are using more of their credit cards. But the one thing that they’ve done with this financial engineering is the credit default swap and unfortunately I think this is going to be the next big one we’ve got to keep our eyes on. [38:57]

JOHN: Ding! Time here for a definition. credit default swaps – explain to people.

JIM: What a credit default swap in essence is an insurance policy against a corporate bond defaulting. It’s basically a credit derivative between two counterparties – one makes a periodic payment to the person issuing the insurance; the other receives the promise of a pay-off if let’s say a bond defaults. So let’s say you’re going out and buying a corporate bond like General Motors or Ford; well, you’ve got a low credit rating on it and you’re concerned about, “Okay, we’re getting an attractive yield that’s way above Treasuries or even mortgage bonds, but you know what, there’s a risk here.” If the economy weakens or the company loses a lot of money they can default on their bonds. So you go out – in essence you’re going out and buying bond insurance. So if the company goes under, you know, the person that issued the credit default in exchange for the premium payment, they make you haul in that bond. So if the company goes under, the bond defaults, you get made whole. [40:06]

JOHN: It would seem very much similar to car insurance, house insurance, so that in a car, you have a wreck they come and pay up even if you’re leasing for that matter. And in this case it just seems to be guaranteeing the deal – that would seem to be what it is.

JIM: Sure. But there is one risk here and as many people like George Soros have said that this could actually create a chain reaction of failures in the swap market that could trigger the next global financial crisis. I think that’s what lay behind the problems with Bear Stearns because they were counterparty to a lot of these credit default swaps. Had they gone under then this could have just ricocheted and created a domino effect in the markets.

Here’s the problem is this market is unregulated, there are no public records showing whether sellers have the assets to pay out if the bond defaults. And so this counterparty risk is in my opinion what we call a ticking time-bomb. [41:04]

JOHN: But you would think that they’d be required to set aside some kind of a reserve here. I mean obviously insurance companies have to do that; you know, they have to have a certain amount of reserve given – especially if something big happens – remember the wildfires in southern California that wiped out 2,000 homes at a pop. So these insurance companies were on the line for a whole bunch of risk – same as Katrina. So doesn’t anything have to be held in reserve, otherwise it would just seem to be an empty paper guarantee?

JIM: Well, in traditional insurance you’re absolutely right – or in the case of a bank. If a bank has a lot of loan write-offs, they have to set aside a reserve against losses from loans that they made and insurance companies do the same thing. That’s how they make their money – they collect premiums, they take the money, they set aside a reserve, they invest it, trying to earn money on it so that when a hurricane hits or a tornado or earthquake or something, they have the funds there to pay out for damages. The unfortunate thing with these credit default swaps is unlike the traditional insurance that you and I are talking about there is no insurance agency or government that monitors the seller of a swap contract to be certain it has the money to cover the debt defaults. In addition, these swap buyers don’t need to actually own the asset they want to protect. So there’s all kinds of just open problems here and this market has doubled in size every single year since 2000. Today I think the last figure is around $63 trillion. It’s larger in dollar value than the entire New York Stock Exchange and you’re really talking about a handful of buyers – you know, the big money center banks and a couple of the investment banks that are the largest buyers and sellers of this credit default swap. And you know, you’ve got groups like Goldman Sachs, Morgan Stanley, Bear Stearns was one and I think that’s what lay behind the takeover of Bear Stearns because it would have set off this chain reaction. The other thing that we know about this market, this market is an untested market. I mean we don’t know how this works in a real time crisis. I mean, yeah, you’ve got great computer models but you know, we all know about the rogue waves and the fat tails of these computer models. You know, it works until it doesn’t work – and this one has never been stress tested. [43:33]

JOHN: Fitch reported recently that 40% of credit default swaps are sold on companies whose securities themselves are below investment grade, and then that amount as far as the totality of what’s being sold out there is really up from 8% going back to 2000. So that’s a radical increase of 32% over just a short amount of time. So this is an increasing trend that we’re seeing here.

JIM: And much like – remember the mortgage debt that was given Triple A rating by the credit rating agencies and what they were doing is looking at the amount of homeowners defaulting on these subprime loans, but they were using past history at a time of economic prosperity. And the same thing has happened with the credit default market. And obviously when the economy is doing well, interest rates are low; you would expect to see lower defaults in the junk bond area. But you know, we’re now entirely in a different type of market. In fact, Fitch or Moody’s is talking about these default rates for these junk bonds are going to increase dramatically going into next year. And especially, John, you know, as we talked on this program as banks deleverage – and remember they like to keep this ratio of 10-to-1, so let’s say banks contract their balance sheet by $200 billion – well, they’re going to contract – that translates into a contraction of lending of nearly $2 trillion. And so it’s going to be harder and harder for a lot of these subprime companies to go out and get financing to keep themselves afloat because in good times when things are prosperous and also money is loose, a lot of these companies that really shouldn’t be alive financially are kept alive by loose monetary policies and easy lending when now, you have just the opposite. Banks are tightening their lending standards for homeowners, for companies, they’re less likely to lend which means a lot of these companies are not getting the access to credit that they need and what that translates into is a higher rate of defaults that are going to be more likely. So you’re going to see the probability that you know, some of these companies are going to start defaulting and then the question is who guarantees or who wrote the credit default swaps, and do they have the money to stand behind and guarantee and payoff on the insurance. That’s because, unlike the insurance companies, once again, these companies don’t have reserves and you’ve got hedge funds that have written nearly 35 to 40% of these credit default swaps. And John, in the best of times, hedge funds are very thinly capitalized because where the banks operate on a leverage factor of 10-to-1, the hedge funds are operating on leverage factors of 30-to-1, and in many cases (as our guest last week in The Trillion Dollar Meltdown talked about) some of these hedge funds are leveraged 100-to-1, if you take a look at the complex instruments that they’re using where they’re taking leverage and piling leverage on top of leverage. Somebody once said about Long Term Capital Management, they were using leverage to turn nickels into dollars. [46:47]

JOHN: How does this factor into the whole derivatives picture that people talk about so much?

JIM: This is the sword of Damocles that hangs over the market. I mean it’s – everybody looks at that from people like Soros to the regulators who are saying, “This is no longer a question of ‘if’ it’s a question of ‘when.’” I’ve read a lot of reports on the credit crisis and they said, “you know what, this is the stuff that we know that’s out there, the problem with credit default swap because it’s unregulated, there’s a lot of unknowns out there. And that’s what makes this situation even more risky.” I mean, you take a look at for example the FDIC just issued its quarterly banking statement: The industry earnings are down 46% from a year earlier; loan loss provisions absorbed a higher share of revenue and the amount of losses that are being reported compared to the loan loss reserves that have been set aside are inadequate – in other words, banks are going to have to start setting aside more of their profits to cover these future loan losses. And so you’ve got this picture here that’s been painted for investors that, “okay, it’s over – the worst is over, the storm is over.” No. As many people are talking about where we are right now – the creamy filling is equivalent to the eye of the hurricane; you know, you’ve got a bit of a storm, we’re now in the middle of the eye of the hurricane and a lot of this stuff is going to come out on the other end. [48:16]

JOHN: Well, if hedge funds have sold 30 to 40% of these types of instruments, and there is no reserve out there to protect against loss, say we have a downturn in the economy, you can see the potential for disaster with this whole thing collapsing.

JIM: Yeah. That’s exactly what Soros said. This could be the next financial calamity to beset the markets. I mean you’ve got – and I’ve seen estimates from 30% to 40% and I’ve also seen studies that have taken a look at this – okay, if this thing hits what are the likely loss scenarios – and I’ve seen figures between 150 to $200 billion dollars in losses. If this happens you’re going to see a lot of big names, a lot of these hedge funds that have done this because what they’re doing is writing these credit default swaps, collecting the premium and that’s great. And that’s why they were sweating bullets when Bear Stearns looked like it was going to go under and till the Fed stepped in because there were a lot of credit default swaps that were written on Bear Stearns’ debt; and it’s one of the reasons the Fed guaranteed nearly $30 billion of Bear Stearns’ loans for JP Morgan to take them over. So you talk about a close call. I mean people don’t realize how close we were to going off the precipice with Bear Stearns.

And here we’ve got another thing out there – you take a look at the Joint Forum of the Basel Committee on Banking Supervision – this is an international group of banking, insurance and security regulators – as recently as April, they said that trillions of dollars of swaps traded by hedge funds posed a larger threat to the financial markets around the globe, and it’s very difficult for the regulators to get a handle on it because the market is so opaque. It’s not like it’s reported on the exchange, or it’s not like the banks that have to report to the OCC and you get these reports every six months. And so, in my opinion, this is another storm that is brewing out there. It’s offshore right now and you can see – you’ve used the reference that you can see the squall lines right now and believe me, as these defaults start to go up with credit tightening and standards tightening by the banks this could really blow up. [50:38]

JOHN: If you’re in the game, say you’re a player right now, and what you’ve done is you’ve hedged because you really think you’re going to protect yourself so you’ve hedged against the guy next to you, but the guy next to you is hedging and before you know it, this is just a big round robin that as something really blows it’s all going to come down together.

JIM: Yeah. I mean there is a huge concentration right now. You only have to read the OCC report in terms of the concentration of derivatives with money center banks to see how concentrated this is becoming. You know, you’re talking about basically 6 to 10 dealers, and then you’re talking about a group of hedge funds; and I mean when this stuff blows up, not even the CEOs of large corporations even have a good grasp at the kind of risk that a lot of these trades have been placed. I mean you had an example, the first or second week of May you had AIG –you know, one of the Dow 30 companies, a huge company – they wrote down 9.1 billion on the value of their credit default swap holdings. So this just gives you an idea of the magnitude of the kind of loss that’s out there. And if you listen to these guys, what is even more remarkable, many of them said, you know, they had no way of gauging the amount of risk that’s out there and that’s just – I mean that’s how obfuscated and how opaque this market is. And a lot of these hedge funds, as I’ve pointed out, they’re thinly capitalized even in the best of times. And you take a look at hedge fund returns, a lot of these hedge funds have been having trouble making some markets, unless they’ve been in natural resources. So if you get some kind of global credit crisis it increases the odds that a number of these credit default swaps where there’s a risk – a real risk that the counterparties could fail – it could shut down – you know, you’re going to see bankruptcies and as these companies go into default, these companies aren’t going to be able to pay out on the contracts. I mean they basically have no set aside to pay these damages if they occur – and just take a look at what you’re reading in the economy: the FDIC report, the economic numbers, the profit declines in many industries. So this just tells me this is a storm out there that’s kind of lurking out there and could erupt just like we did last August, with one or two banks in Europe that reported they couldn’t cover; or June last year when Bear Stearns first reported that their hedge funds were under. I mean just take a look in the last past year, banks have written off $323 billion in debt. [53:20]

JOHN: How does this factor into the perfect financial storm? Is this another big bump en route to the land of Oz, or is this really the onset; how do you see it?

JIM: You’ve really got three aspects of the storm. One is economic: what happens to the economy – that’s one aspect of the storm, that’s one storm front. Two is what happens to the currency; so you’ve got a currency crisis. And three, is you could have a market crisis. So you could see all three storms come together and converge and normally it could be one event that triggers the whole thing. It could be a series of defaults in the bond market where you have counterparty risk and the hedge funds or the banks that issued the credit default swap can’t pay; it could be a crisis in the oil market at $200 a barrel because simply demand overwhelms supply. So there are a number of factors. They could be geopolitical; in other words, the three storm fronts are the economy, the markets and the currency. And it’s just like a bomb, what lights the fuse? Is it a credit default swap, is it $200 oil, is it a geopolitical event? But whatever it is that sets things in motion and once things are set in motion it just overwhelms everything. [54:43]

JOHN: It reminds me of snow on a mountain peak at the right angle and the right temperature and everything, just waiting for that little piece of energy to turn it into an avalanche and that’s pretty well what I think we’re looking at. So it’s just a question of when, not if – just like you say.

So remember to take your location detectors with you, if you happen to go skiing in the back country…in the middle of summer. Yes, here we are. I’m going skiing. You’re listening to the Financial Sense Newshour at www.financialsense.com. Back with the next hour in just a minute.

Part 2

Crime of the Century Part II: How They Scam Individual Investors

JOHN: Well, last week we created another flurry of activity with the first part of what is becoming a four part series called the ‘Crime of the Century.’ And we were talking about the phenomenon again of naked short selling. Bloomberg did a piece on naked short selling some time ago and you can usually find those segments up on YouTube if you want to watch them.

Today we’re going to talk about scamming individual investors because people have written us emails saying, “well, how do I know if they’re naked short selling what I’m involved with?” And there are other schemes out there designed to defraud investors. You know what has really impressed me the most is the fact that a lot of times people will invest and in theory the people with whom they invest are supposed to be, in a fiduciary way, watching out for their investors’ best interests but in reality they’re using their investors for their best interests and leaving the investor holding the bag. That’s the real immorality of the whole situation.

JIM: That’s what a lot of people have written about, that is called the ‘agency issue,’ where the person that you’re working with is working against your own interests and as we talked about last week there are a few bad apples on the Canadian investment banking side – not everybody, but there are a few bad apples. Some of them have been fined; in fact there is a current case going on right now and that’s what they do: They’re acting against their clients, the mining companies, and acting against their customers, the individual shareholder of the companies that they put them in. And it’s amazing how pervasive this is. We did an interview earlier in the year called Lost on Bay Street, with Alex Doulis who was an investment banker in the mining industry and he talked in a kind of tell-all book (he retired about 20 years ago) and I think a lot of people say “nah, this doesn’t go on.” I mean it is just amazing the deception that goes on here. [2:02]

JOHN: On a day-to-day basis you see this because you’ve got real time observation through a variety of different electronic tools. What we’d like to do here today on ‘scamming individual investors’ is give them an blow-by-blow inventory of how the scams function. So let’s look at the first one that’s called the Friday-market-close-spoiling-your-weekend.

JIM: Anybody who has learned technical analysis is – you know, you’ve got short term trends, you have intermediate trends, you have long term trends. In other words, what’s going on on a weekly chart is probably more important than what’s going on on a daily chart, and also what’s going on on a monthly chart is more important – in other words, the monthly trend is more important than the weekly, the weekly more important than the daily. And this is a favorite technique and what they’ll do is, you know, a Friday before let’s say a holiday weekend or late Friday afternoon, you know, people are heading for the weekend, the last 10 minutes or 15 minutes just before the market closes, what you’ll have is a stock’ll be up – let’s say the stock is up 5% and then out of the blue 5, 10 minutes before the market closes comes a flurry of sell orders that come in and it’s done with naked short selling, or short selling. And what they’ll do is they’ll take this stock from being up 10% to being down 10% and close it on a negative basis. They’ll do it on a day let’s say that gold stocks are up, or the gold market is up or has been up all week, and they’ll slam the stock for a loss for the day and they’ll do it in the final minutes of trading on a Friday night. And what they’re trying to do here is manipulate the charts on a weekly basis and they’re trying to do it towards the end of the day when not too many people are paying attention. But it’s obviously done deliberately when they do this. [3:51]

JOHN: Well, at a break their, Jim, you were telling me that something just hit the wires – what was it?

JIM: On Friday a law firm just filed on behalf of Taser shareholders a lawsuit against the largest Wall Street firms, including Bank of America, Bear Stearns, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, UBS. The complaint accuses the defendant firms of engaging in a conspiracy to manipulate the market for Taser stock through naked short selling. And as we stand on this Friday, Taser shares are on the Threshold Security List – meaning that there’s a large amount. And the way it was discovered at their annual shareholder meeting, Taser has roughly about 60 million shares outstanding – and John, guess how many shareholders voted at the annual meeting?

JOHN: You know, I don’t know.

JIM: 80 million shareholders!

JOHN: So obviously this is becoming a known event or factor.

JIM: Oh yeah. It’s affecting shareholder meetings. I mean a company has 62 ½ million shares outstanding and 80 million shareholders voted at the annual shareholder meeting. So this is just a good example of how blatant this thing has become. And that’s why we’re calling it here the Crime of the Century. In Canada, it’s bigger than Bre-X; and this thing is just exploding as we speak. And guess what? The way it’s going to be solved is class action, billion dollar lawsuits. And John, that’s coming. And that’s the only way the crime is going to be stopped. It’s easy to catch these guys because there is a paper trail, but here is an obvious thing where this stock has just been on the naked short list –on the threshold list – and you know, it shows up in proxies, it shows up in shareholder meetings. This is just a good example. [5:33]

JOHN: So in the case of this happens, this isn’t just a broker who’s representing somebody and just happens to have shares to buy or sell late on a Friday, like “towards the end of business, okay, we’ll place these trades for my client.” This is really a planned strategy because you can see it suddenly come online on a Friday on a regular basis.

JIM: Yeah. I mean it’s done – it’s done to manipulate, it’s done to change chart patterns, it’s done to scare investors, and the reason it’s done to manipulate the market and the reason they’re doing it is because if you called up a broker and let’s say, you know, your stock is trading at a dollar and you say, “look, I want to sell 40,000 shares, the gold market has been up, the stock is up 10% today and you call up your broker. You know, just think what you’d be doing to your broker if the stock was up 10%, he takes your entire order and waits till the last 10 minutes before the market closes and puts and sells your stocks down, taking your stock from up 10% for the day down 10%. I mean you’d be firing your broker. So this is obviously done with the objective of manipulating and starting a selling trend in the stock and it’s always done when people aren’t really paying attention. I mean most traders by the end of the day, you know, the last minute of closing, nobody has got their eye on it so it comes out of the blue and it’s done intentionally to take the markets by surprise; and what they do is they take the stock from being up and they take it down for the day to a loss position. [7:06]

JOHN: Okay. So let’s go to item number 2. Last minute drop down. This almost sounds like the same thing.

JIM: Yeah. It’s a similar technique that they’ll use, but what they do is instead of doing this on a Friday just before the market closes, they’ll do this in the last 30 seconds of trading for the day, or the last two minutes before the market closes. The stock can be up a couple of pennies and then what they’ll do – and you can see this – they’ll do a cross trade between themselves. In other words, if there is not a bid there – in other words, there is a bid where people are actually saying here is a price where I want to buy this stock and then there is an ask price that’s where sellers are willing to sell it. If they don’t see bids that they can hit, they'll do it internally within themselves and they’ll create the bid and they’ll hit themselves; and they’ll do it usually with 100 shares, 200 shares and what they’ll do is they’ll knock the stock price down from being up from the day, or they’ll knock it down a couple of cents or sometimes even knock it down quite a bit. But it’s always done within the last couple of minutes of trading and so we call that the ‘last minute drop down.’ It’s very similar to spoil-your-weekend technique that they use 10, 15 minutes before the market closes on Friday. [8:21]

JOHN: Is there any way to defend yourself from that?

JIM: We’re going to get to it. I mean, yes there is – you can turn this kind of activity into the regulatory authorities and we’re going to post on our website the officials that you can contact in Canada and also the SEC on the US side. So absolutely, there are things that you can do when you see this kind of activity. But then we’re also going to talk about how you can take advantage of this when they know that, you know, the bad apple investment banks are trying to manipulate the price and steal from the shareholders. [8:54]

JOHN: Carpet bombing is the term that is used. What does that mean?

JIM: It almost reminds me of – you know, remember in World War II when the Allies were really just carpet bombing a whole city towards the end of the war. This is usually the prelude to a short selling raid on your stock. It’s usually done – the bankers will do this ahead of a financing because they’re trying to drive the price down. And what’ll happen is out of the blue – let’s say a stock trades – I don’t know – 30, 40, 50 thousand shares on a daily basis. All of a sudden, out of the blue, out of nowhere – it has nothing to do with news – they will come in and one day sell 500,000, 600,000 shares, 800,000 – I’ve seen almost a million shares – and they will just crush the stock. They’ll take it down close to 20%. And investors are saying, “What happened!” And people are looking around, calling the company, “Is there bad news. Is there something wrong with the company?”

And how it is done, is it’s done in a selling fury and what they’re trying to do most of the time you’ll see this activity done by the bankers with the hedge funds prior to a financing of a company. I mean it is absolutely common place in the industry today. And what you can usually do within two to three weeks of this event taking place, watch for the short position to be reported because 9 out of 10 times this is not the way you would sell if you were executing – like let’s say a brokerage firm called up their clients and said, “Look, the stock has had a run up; we recommend that you take profits.” This isn’t the way you would be executing a trade on behalf of your clients. This is done with the express purpose of manipulating the stock, starting a selling run on the stock; and they do it with heavy volume and they crush the stock, wiping out, taking out all the bidders that are out there and they’ll crush the stock. And it’s done with heavy volume. That’s what I call ‘carpet bombing.’

And also, another thing that you can check with. In addition to the short position as a check against this, also look for a financing to be announced by the company. Usually you can tie the short position and you can tie the financing of the company with the carpet bomb. [11:15]

JOHN: Okay. There is something here called the ‘morning pop,’ which almost sounds like the opposite of the last minute drop down.

JIM: The fourth manipulation technique is something they call the ‘morning pop, end of the day drop.’ What’ll happen is they’ll get a little activity going in the morning, the stock is up and they’ll sell into the morning rally or they’ll short into the morning rally. Okay. Now, they’re shorting – the stock is going up in the morning – what they want to do is close out their positions at the end of the day at a profit and so at the end of the day they’ll start covering their shorts by hammering the stock and they’ll do a number of techniques – the last minute drop down is usually the favorite one that they’ll use in combination with the morning pop, end of the day drop. And what they’ll do is a couple of minutes before the market closes, the last 10 minutes of the market, all of a sudden selling emerges out of nowhere and especially if by the end of the day, buying interest in the stock has sort of thinned out. So that’s usually done with a combo, with the last minute drop that they use to take the stock down because then they cover their short positions; also their short positions are in the black and they’ve made a profit. [12:25]

JOHN: This is starting to sound musical. It’s the ‘drop, the pop and the hand off’ is what we’re talking about.

JIM: It almost sounds like a Top 40 song.

JOHN: It sort of does, or some sport. Anyway.

The ‘hand off.’ Now, this one as we explain it looks like somebody has got to be collaborating on this to make this one work. This isn’t just a one side raid into the market or something like that.

JIM: No. This one usually involves collusion between a couple of the investment banks and the hedge funds – the bad apples – because it takes more than one to pull this off. What will happen is let’s say a stock is traded on – I don’t know – the Toronto exchange and it’s also listed on the AMEX. What will happen is you’ve got two or three parties that are working together in collusion on this. One party will sell the other party a stock. Let’s say that investment bank A sells investment bank B 500 shares. And what will happen is then investment bank B will immediately turn around and let’s say sell those same 500 shares they just bought on the Toronto exchange, they’ll sell them on the AMEX exchange. And they keep doing this – back and forth, back and forth, back and forth. And what happens is it generates all of a sudden heavy selling activity that’s being generated on both exchanges and they go, “Oh my goodness! People are dumping the stock.” And that’s to flush people out, get other investors to where they’re fearful that “oh my goodness…,” all of a sudden there is a lot of selling coming into the stock, it’s on both exchanges, traders see that; and what they’re doing is trying to shake the apples off the tree and they’re trying to generate a lot of selling. But this one takes collusion between two or three investment houses to pull this one off. [14:12]

JOHN: What this sounds like is some kind of a coordinated arbitrage: buying on one exchange and selling on another. So what would make this potentially unethical?

JIM: Well, on the surface I mean there is nothing wrong with arbitrage. If you can buy a stock cheaper on one exchange and sell it on the other, there is nothing wrong with that. That’s just arbitrage; that’s what arbitrage is. But when you see the same investment house selling to another investment house and you see these two working together, if investment house A was really trying to arbitrage, why wouldn’t they just instead of selling the shares on the Canadian side, why wouldn’t they just go directly to the US side and sell the shares and make the money themselves? In other words, why sell it to investment house B and then B sells it on the other exchange. What they’re trying to do is generate heavy selling activity and generate enforced selling; and there is nothing that gets people’s attentions and scares investors when they see the price of their stock getting hammered and going down 10% and it’s being done on heavy volume – and especially if it’s being done on both exchanges. So that’s why it’s beyond arbitrage; it’s just another technique where they’re trying to shake investors out. And normally you’ll find that when they’re doing this in the stock, you will find that the stock they’re doing this in has a large short position. The same thing as I mentioned for example when they carpet bomb a stock, you’ll normally find a large short position, or the stock – all of a sudden a naked short position is reported on the exchange. [15:48]

JOHN: Okay. This next one is called the ‘whopper.’ And it probably doesn’t sound like hamburgers I’m going to guess – nothing with cheese on it and maybe some horsey sauce or something like that.

What are we talking about here?

JIM: This is another manipulation scheme that they use and let’s say that during the day that the stock normally trades, the volume in the stock is 25,000 to 50,000 shares. And what they’re trying to do – let’s say buying starts to come into the stock – you know, just small investors buying 500, a thousand, two thousand – all of a sudden, out of the blue someone puts an offer at the tape, 100 thousand or 200 thousand. And all of a sudden – the stock isn’t trading heavy volume and somebody puts an offer on the tape – a huge offer that is just two or three times the volume of shares traded. That is done to discourage buying and all of a sudden people say, “oh my goodness, did you see that offer of 111 thousand, 110 thousand…” what they’re doing is they’re trying to discourage buying and say, “oh my goodness, somebody big there, some institution is selling.” What they’re doing here is trying is trying to discourage and manipulate the stock priced by discouraging buyers and then encourage them to sell because there is a big seller here. So what happens is the little guy sees that and says, “oh my goodness, I’m not going to buy. I better sell now because there is big selling coming into this stock.” So once again, this is just another form to scare the little guy and pick his pocket. [17:27]

JOHN: This next one sounds interesting: ‘Bash and cover.’

JIM: At the same time that these guys are manipulating this stock, what they’re going to do – now remember, what they want to do is scare people. In most of the cases they’ve used naked short positions to do this because they couldn’t do this selling shares for client accounts because they would get sued if that’s the way they executed a sell order for a client. So it’s done with naked short selling. Now, they’ve done this. They’ve gone in. They’ve taken a naked short position to drive it down. Now what they have to do now is they have to cover their short position. So how do you cover? Well, you’ve got to scare people out of the stock. So they have brokers at the firm that they pay – they’re called professional bashers – and what they’ll do is they’ll start showing up out of the blue – good results come out and all of a sudden you get these nefarious characters that show up on a chat-room and they start putting out false information. I’ve seen them where they said the companies bankrupt or they say the drill results are phony. They start impugning the management, board members, and they’ll start attacking the company, the management of the company, the board of directors and they start putting out false, misleading information. And the purpose of which is to create negative sentiment in this stock - because remember, when you’ve got a naked short position you’ve sold shares, you’ve sold counterfeit shares that you don’t own; and so eventually you’re going to have to cover that because it’s reported on the exchange. Well, how are you going to cover and make a profit? You’ve got to scare people out and especially the little investor. And so what you’ve got to do is you have these professional brokers that go onto these chat-rooms and then what they do is they start putting just a series of negative stories that call into question the company and they start scaring it. And most of them it’s rumors, it’s false, it’s innuendos; but the express purpose is “we’ve shorted the heck out of this stock, now we want to take profits, so we’ve got cover our short positions.” [19:40]

JOHN: Didn’t people do something like this in the late-90s. As I recall, there was some kind of scandal out there. Some people went to prison. I mean what about Charlie Sheen in the movie?

JIM: Well, it happens. There were a couple of individuals in the late 90s that were going into chat-rooms and they were using the chat-rooms to manipulate the stock. Yeah, you can go to prison for this. In fact, you can get sued over this. It’s libelous, especially when you impugn the character of management, board members or the company itself. And especially when you’re putting out false information with the idea of profiting from that false information by your short position. This is a felony. And there was a recent case I think in the Bloomberg special where they talked about a hedge fund that was doing this and they got caught and now the people in that hedge fund are doing prison time. [20:28]

JOHN: Probably the first tip off in the whole thing is the fact that somebody shows up on one of these blogs or in the chat-rooms and then begins to pump out all of this negative information. The first thought you would want to have is doesn’t this person have a life. I mean, you know, it’s okay to be there for a couple of hours a day, or an hour or so, but as soon as they do that then you have to suspect that there’s something else going on. But it’s amazing how people tend to fall for this stuff.

JIM: Oh, absolutely because you’re right. The first question is you should ask: Why is this person doing this, saying all this negative stuff, if he doesn’t own the stock why is he spending all this time on this stock chat-room; what’s his motivation? His motivation is to put out false information so his short position can cover by scaring innocent investors by putting out false information. So John, this is a felony offense because what you’re doing is you’re trying to manipulate the stock price for the benefit of covering a short position – both of which are felonies. [21:34]

JOHN: So why isn’t this policed? Why can’t they do that?

JIM: I mean it is so widespread on the chat-rooms. It is so widespread – it’s been going on for decades in terms of putting out rumors and stuff like that. You always heard this with shortsellers, but you know, the internet has now given immediate response for the shortsellers and the criminals. They now can use the internet to their advantage to spread false information. [22:01]

JOHN: Let’s pick some real world examples about this. As a result of our show last week, a new blog came out on Stockhouse which is one of the chat areas and let’s read what was in there because this is a prime example of exactly what we’re talking about.

JIM: Okay. I’m going to read this. This is on the Stockhouse board. They’ve got a new blog called junior mining investors robbed by Canadian investment banks. And this was a blog post – in fact, it was one of the first ones. And it goes:

Hello, as many of you are aware I am a paid basher. As childish as bashing might seem on the surface, a lot of money actually exchanges hands based on the work we do. I work for an investment firm based in Toronto, Ontario, Canada. I worked in cooperation with several others and under several aliases in several online investment forums

And he lists his different monikers.

To make a long story short, I have had an epiphany in the past few days. I watched the movie Fight Club and as brutal as the movie is on the surface, it actually caused me to question a lot of things I do or have done in my life. The next day I was involved in a single vehicle car accident which caused my vehicle to roll over. I walked away from it all but it got me to thinking: I only live once. Is this what I want for my life? Is this what I’ve always wanted to do? I’m not even proud of my career or myself. I say that I’m a stockbroker, but that’s a lie. We are basically paid con men. I quit today, no questions asked. I just walked out. I’m 23 years old and this is not what I want out of life. The scheme works like this. Be aware of it so you can guard yourself. Our company monitors undervalued companies with strong assets and strong potential. When a company, for example, reaches an overbought situation, our company begins selling shares we do not own in the hopes of purchasing these shares at a lower price later on. As the share price dips, our company purchases these shares for a cheaper price at a lower ask price. That is where we come in. We bash the stock online to try and further the negative sentiment so that the stock gaps down and increases our profit margin. This type of activity is called naked short selling and should be made to be illegal. Our firm is a well-established one that deals out shares that we don’t own and then sends out an army of online rats to undermine the company’s successes to drive the price down.

And the he goes on and talks about that they get paid – and when you respond to a basher you’re actually helping him. He goes here:

Learn how professional bashers are paid. When you reply to bashers you give them an opportunity to earn approximately 5 to $7. The service agreement that they enter with their employers state: Their messages will be monitored for content, profanity and lies – the more the better. But overseers and the like don’t have the time to check all their bashed messages. Only occasional spot checks are done. Those who manage the basher will generally read the headlines to see if a basher is replying to other posters by name. That tells them the basher isn’t just posting blindly or repeatedly the same message over and over, since they won’t get paid for those. True to form, a basher will put the bite on anyone, even their unscrupulous employers. A basher will attempt to milk three to five replies per post at one to two dollars each. This way, the bashers spreads negative influence to as many stockholders as possible.

And you can read this post. I’m not going to get into anymore but this is just an example and anybody who is in this sector that has gone to a chat-room obviously has seen many of these guys show up in a stock, bashing management. And it’s funny. On the Canadian side you can get sued for libel much easier than you can on the US side. I mean it’s much easier to libel somebody, so a lot of times they’ll show up on the US chat-rooms on Yahoo and it’s one of the reasons a while back we interviewed the proprietor of a new forum called Agoracom.com and that was strictly to eliminate these bashers because they know these bashers are brokers paid by shortsellers to influence the price of this stock. That’s how pervasive this is. It’s almost equivalent to the mutual fund scandals that were revealed a couple of years ago where mutual fund clients allowed their professional clients an unfair advantage against regular shareholders. [26:50]

JOHN: Jim, I want you to check your trade screens for now, I can’t name the company here but tell what you see happening on there.

JIM: We have a combination here of manipulation technique number one, spoil your market. This stock has been up 10% for the day and it’s a combo of spoil your market and a last minute drop down. Here we are – as you and I are talking, there are two minutes to closing market and all of a sudden they’re knocking out all of the bids and driving the price of the shares down. So we’ve got the spoil your market weekend, and we’ve got the last minute drop down occurring as you and I are speaking. In fact, we’ve got – let me just see here – one minute before the market close I’m monitoring this in two markets. This company is listed on two exchanges and it’s amazing, we’re talking about it and I’m watching it unfold as we talk. [27:47]

JOHN: It’s interesting we look at this – I’m not going to read person and place and everything –

Jim and John, I don’t want to take up time on the questions of the Financial Sense Newshour but I do want to address Jim quest of blasting the naked short carpet bombing. You are wasting your time and money. The Vancouver and Montreal stocks exchanges and to some degree the Toronto as well are just not geared to give you the high ethical standards you want to impose on everyone. You cannot change the system. You will go broke trying. You do not have the money. What is ethical here in the US cannot be imposed on a system which has been in operation for decades. Besides, I can hear it right now: Who does this Yank think he is? Let’s fix his clock. You can bet on it once you are blacklisted. They’ll succeed.

Well, the email goes on:

Some time ago you had a guy on your show who talked about Murray Pezim. He was the guy who was the inventor of this practice. There were a group of us in our late 20s who had studied Murray’s tactics in the 50s. Murray was an habitual guy who operated basically the same way in every promotion he took on. We searched the Northern Miner, Financial Times, Survey of Mines as soon as it came out for companies that Murray was in and played the game, not on the basis of what the company had but on the basis of how we knew Pezim operated. I do not know the ratio, but I would say only one prospect in 60 will ever become a mine. But the 59 Get-Rich-Quick Uranium Ltd.’s owned by a crook want financing, so they go out and hire a guy like Pezim offering him 10 million shares at 25 cents and give him a directorship which he will put on hold. Say the stock is selling at 25 cents and the company has 60 claims 10 miles west of the Denison ore body. They have done surface scratching and would like to do some diamond drilling. The reason Pezim had to leave Toronto in the night and appeared subsequently in Vancouver in the 50s was: he used some assay results from someone else claiming they had come from his latest promotion – a common practice in penny mines. We usually hopped on Pezim’s stocks between Christmas and New Year’s and got out early March and shorted it late March, early April covering late September. By far the best and most successful effort you can use to help would be in my opinion to tell the US public about the companies which are about to go into production, such as you were doing now [JOHN: And he lists a bunch of them], interviewing the executives of these companies and giving us your opinion on the economy. [30:09]

JIM: The first thing that we’re trying to do here in these seven manipulation techniques is at least warn people when they’re fleecing and when they’re going to try to pick your pocket, so you can be aware; and then I’m going to tell you how to take advantage of it in just a moment. And I guess the other thing I sort of disagree here in the age of the internet information travels. I was amazed at the response to last week’s program. You’ve seen nothing yet. Wait till you see what’s coming next week, and the week after and the week after that. So this information is getting out there and hopefully if enough of this information gets out and you’re going to hear from in just a minute a clip of Harvey Pitt who used to be the head of the SEC giving a speech in Washington about this practice, and also a Senator from Utah, Senator Bennett who just gave a speech on the Senate floor on this issue. So as more and more people hear about this, hopefully as the mainstream picks up on this, eventually it’s going to be picked up by regulators and perhaps a political person wanting to make a career and that’s how you bring about change. [31:14]

JOHN: And we also look at the fact that this whole issue of really a crime of naked short selling has gotten the attention of Bloomberg already, that of a former chairman of the SEC, and some people in Congress are already beginning to talk about it, so there is already attention being paid to it. And as more and more scams emerge on Wall Street – or at least more and more trouble – I think people will be more and more inclined to listen to things that they can prevent.

JIM: Sure. As this information gets out on the internet and so investors see this kind of activity occurring in a junior stock, at least they’ll know what’s causing it. They’re not going to say, “Okay…” the last thing you want to do is you own the stock, you panic, you go to the chat-room and there’s some basher trying to scare the heck out of you. You’ll be aware of the crime they’re trying to commit and you’ll recognize it for what it is. There is a lot of this information. All you have to do is type in the name of a brokerage firm and then put in “naked short selling” next to it and just google it and you’ll see. I mean there is a case here that was reported – there’s a grand jury indictment out of North Carolina that involves seven BC brokers – this was reported in the Vancouver Sun on April 29^th of this year. Last year there was one of these firms that was fined for naked short selling, so I mean the information is out there. One of the ways if you’re going to be in this sector, we recommend that you go to Stockwatch, Stockhouse – you get a Level 2 where you can see where the bids and asks are, you can see who is selling the stock and the way that they sell it. You can see who is buying the stock; you can accumulate for example in a month, you can say, “all right, who was the largest seller of this stock?” And this is what I’m teaching mining companies where I can show them how the investment banks are doing this to their stock and they’re trying to drive their stock down ahead of the financing. So there are programs that you can spend and you can get this information.

So, John, let’s go now to Harvey Pitt, who is the former head of the SEC in a speech that he gave in Washington towards the end of last year regarding naked short selling:

First, SROs and the SEC need actively to pursue ongoing chronic and serial short selling infractions. Next. Meaningful penalties have to be imposed for violations of existing Reg SHO requirements. Third, the SEC should define and punish as fraud, abusive naked short selling practices. Next. The SEC should act quickly and forcefully, otherwise, state regulation is more likely. And as I’ve already said, I don’t think that’s the best way to go.

Our capital markets work because they’re governed by uniform rules from Portland, Maine to Portland, Oregon. State regulation means fragmented requirements, practices, and procedures, and could cause loss of our competitive edge. Next. The SEC should eliminate the option market maker exception. It isn’t demonstrably of any value, and it risks facilitating illegal activity. Next. Reg SHO should impose firm locate requirements as a condition precedent to all short sales. Next. Reg SHO should cover securities that are also traded in the pink sheets. Naked shorts occur in the shares of small, thinly traded issuers, and those are likely to trade in the pink sheets. Next. Chronic and unjustified violations of T+3 settlement rules should be punished. Next. Before brokers are allowed to borrow margin shares, they should make clear disclosure and give investors the opportunity to opt out. Next. Securities lending should occur openly and transparently at arms-length prices, enhancing returns, increasing efficiency, promoting valid short selling, and curbing abuses.

Next. The NSCC should allow members to settle borrowing and lending activity through these facilities that I’ve just mentioned so accurate accounting and data is available to market participants and regulators. Next. Shady activities thrive in shadowy market corners. Exchanges in other markets should be required to report the securities on daily threshold lists and aggregate daily volume of fails for each such security. And, finally, Form 13F, institutional investor’s reports, should disclose both short and long positions. That would provide issuers and investors with a better understanding of trading activity. [37:04]

JIM: Here was the former head of the SEC. He is talking about how bad this has become. And you notice one of the first things he said: you’ve got to impose meaningful penalties. And you know, there was a firm last year that was caught doing this in Canada and they were fined $75,000. And I mean that’s like handing out a parking ticket to a bank robber. As long as the penalty is only a parking ticket, you’re going to see more banks robbed – or in this case, more companies and shareholders robbed. And we’re going to get into the solution; a plan that should be adopted in terms of legislation and it would involve penalties that are equal to 100 times the amount of fees that the bankers collected in doing this. That’s because the bankers are the gatekeepers. A hedge fund would not be able to get away with this kind of activity if it was properly supervised by the banks.

Secondly, like Sarbanes-Oxley, you put the CEO of the investment bank in prison for 10 years and exchange his pin-stripes for orange stripes. And so I want to get ahead of myself because we’ll be talking about this in part IV because next week we’re going to have a law firm that is a specialist in this kind of activity and also class action lawsuits. And we’re going to talk to him about these activities in terms of how it goes on, how it’s manipulated and what are the legal consequences for people caught doing this kind of activity.

But it is starting to catch on, more people are starting to notice it. [38:39]

JOHN: And it’s not just the SEC. We now have prominent senators – Senator Bennett from Utah I would say talking about this on the floor of the Senate. So there is now attention being paid to it. And as I said, if things tend to get worse just even economically there will be a lot more motivation for them to take notice and do something preemptively so to speak rather than waiting until another debacle erupts in their faces.

JIM: But you know, John, that’s here on the US side. On the Canadian side they need to play catch up. I was at a gold show when I first became aware of this back in late 2002 and 2003 and I can remember talking to a mining company executive who was made aware this his investment bank was doing this to his stock and basically they ended up not doing business and there was a little bit of an altercation. This was at the San Francisco gold show and I can remember the mining company telling me that the investment banker said, “you know, we’re untouchable.” And it’s amazing because in the April 29^th story in the Vancouver Sun involving seven Canadian BC brokers who were caught in this illegal activity, one, the Investment Dealers Association of Canada was hot on the trail of one of these firms in regards to this allegation. So what they did is they appointed a public accounting firm to supervise so that they wouldn’t engage in this kind of activity. And lo and behold, even when they were supposed to be supervised by this accounting firm the firm still went ahead and did it. In other words, crime pays; if you can rob a bank and all the fines are going to be equivalent to a parking ticket, you’re going to get more of the same activity. And so here you had the BC authorities supervising a firm for engaging in illegal activity and they hired a public accounting firm and in the midst of this they catch them doing it again – even when they’re supposed to be under supervision. This gets back to the story that this mining company told me. He goes, “We’re untouchable. You can’t touch us.” This is just a blatant disregard – it’s been going on for two or three decades and that is really the attitude that many people have today. [40:57]

JOHN: Well, maybe yes and no, as far as the untouchability. Maybe untouchable today but as we said, there is more attention being paid to this.

Here is the transaction: Broker A shorts 1,000 shares. At the end of 13 days, which is the period he has to produce the shares, he has been unable to find any--probably hasn't even looked--but he has this requirement under the SEC rule to produce 1,000 shares. So he goes to broker B and says quietly: “Sell me a thousand shares.” Broker B says: “I don't have any.”

Broker A says: “It doesn't matter. Sell me a thousand shares so I can cover.”

Broker B: “All right. I will sell you a thousand shares so you can cover. And there will be no passage of money. This is just a deal between the two of us – a rollover.”

At the end of 13 days, broker B has to deliver a thousand shares, so broker A sells the same 1,000 phantom shares back to broker B, and they ping-pong these back and forth for as long as they want.

So you can have a situation where people are selling shares that don't exist, taking commissions on the sale, and the profits of the sale, and never, ever having to produce the shares." [42:22]

JOHN: That was Republican Congressman Robert Bennett from Utah, describing on the floor of the Senate exactly how the naked short transaction takes place.

JIM: Yeah, they just keep rolling it over from one broker to the other. I’ve seen junior mining stocks remain on the naked short list, John, for literally months.

JOHN: You know, when you really look at it and we’ve boiled it all down, it’s a fancy series of transactions but it just boils down to basically counterfeiting shares that don’t exist. They’re created in phantom space. As we conclude this whole segment, let’s listen to Wes Christian from last year’s Bloomberg special on this. This is just a very short cut.

This same conviction motivated Patrick Byrne to hire 6’ 6” John O’Quinn, one of the few attorneys in the country tall enough to look him in the eye; and by reputation a giant killer. In Texas, they call O’Quinn the Billion Dollar Man because he won billion dollar judgments against makers of silicone breast implants, and Phen-fan and against big tobacco.

“The deal is rigged so bad I can make this statement safely: You have more chance to be treated fairly in a casino in Vegas than you do in the stock market. The securities industry has things rigged where they can deal from the bottom of the deck regarding your stock and your money.”

O’Quinn’s co-counsel is another Houston-based attorney, Wes Christian. Together they represent some 20 US companies that all claim damage from naked short selling, including Overstock, Sedona Corporation and Taser. They represent Overstock in a lawsuit seeking 3 ½ billion dollars in damages from Wall Street’s biggest prime brokers, accusing them of executing short sales with no intention of delivering stock, causing Overstock’s share price to drop. All the accused had declined comment on pending litigation.

“If you’re a short seller, and you abide by all the rules governing short sales, then fine – It’s legitimate, it’s legal, it’s proper. That’s not what is going on on Wall Street. What’s going on on Wall Street in our cases – and we’re now seeing in many other companies is a rigged system.”

“Which is just stealing is all it is. This is all an example of stealing.” [44:18]

JOHN: You know, as I go down this list, we talk about spoiling your weekend (which is really a market-close type of tactic), last minute dropdown, carpet bombing, the morning pop, the hand off, the whopper, and bash and cover; for the average investor this is like swimming in a shark-infested ocean. How do they hope to survive in the midst of all of this?

JIM: One of the reasons we are trying to expose these seven techniques is so that if you are an investor, let’s say you’ve bought a few shares of a junior and you see these manipulation techniques that “ah,” you’ll say, “I know what they’re doing.” And so they’re not going to frighten you – or if you see a basher show up on a chat-room and all of a sudden he starts to knock down the company, say bad things about management, its board of directors, the project, the drill results etc. And so that you can be made aware of it.

But you know, the other thing is you need to learn to buy your shares much like the smart money commercials. In the futures market you have the commercials and then you have the non-commercials; and the non-commercials tend to trade in the futures market, they’re more momentum based, they just jump on anything that’s going up. But if you watch the commercials – these are hedgers, people that may be using the product – these are the smart guys, the smart money in the market and usually what’ll happen is when something starts to trend down – let’s say a particular commodity like oil is trending down and it’s selling off – what will happen is – let’s take the reverse position first: Something starts to go up and it’s really going up in price, a commodity, let’s say it’s oil. What the commercials will begin to do is they will begin to sell as it keeps going up – not all at once, not trying to smash the price of the commodity because they would lose their profits much like these bad apple investment banks and their hedge funds try to manipulate the stock. But the commercials will come in as the price is going up, they will start to scale in their sell orders. Conversely, when a commodity is in a down trend what you’ll see them do – they don’t go in at once and buy and say, “Hi, we’ve picked the bottom. This is it,” and they blow their wallet and they buy. What they’ll begin to do is they’ll start scaling in and quietly accumulating as it goes down.

So the way you work against these illegal shortsellers and naked manipulators who are basically trying to pick your pocket, what you do when you see this kind of activity, whether it’s 15 minute close on Friday and they start to take the stock down – it was amazing, John, while you and I were doing this show it was actually happening with one screen I had of a particular company on my Bloomberg. And they were doing this in literally the last two minutes of the close – and the Friday-market-spoil-your-weekend and the last minute drop down. But if you see this kind of activities occur – let’s say you have a Level 2 with Stockwatch or Stockhouse, then what you do is, okay, they’re manipulating the stock, what you do is you have a bid at one dollar, remove that bid and lower your bid and force the shortseller to go to your bid. In other words, lower your bid and make them sell you their shares at a lower price because there’s greater risk to a shortseller if you keep forcing him to come down lower and take your bids because that way you’re buying at a lower price.

But more importantly, if you see this kind of activity at least now you’ve been alerted to it and you understand them because, John, you seen it, we’ve gotten a lot of emails on the show “I don’t understand XYZ company reported great drill results; they just reported a resource update and they’ve increased the amount of ounces by 250,000 ounces and the stock goes down. Now when you see this Friday market close and they try to smash the stock or two minutes before the market closes at the end of the day. They’re taking the stock down, it’s up. Or carpet bombing – all of a sudden out of the blue huge volumes of heavy selling comes in. When you see that activity you now know you can check with for example the short position; within the next two to three weeks, you know you can check if the company is doing a financing so you’ll spot their investment banker selling the shares short in heavy selling prior to the financing.

So now you’ve been alerted to these kind of things, now you can use that to your own advantage and then we’re also going to post on the website the complaint section for the SEC and last week we didn’t post the Canadian’s side so now we’ve got the Canadian side so you can report this activity in the stock. It’s amazing, John, I’ve already gotten calls from probably 10 mining companies and I’ve already set up three of them, how they can monitor – these are companies that are going to be needing financing in the next six months and I told them how they can spot this kind of activity with the bankers that they’re talking to and force the bankers to sign an agreement that they have not in any way engaged in short selling. So this is the kind of stuff – there are steps you can take and I do believe in the end right triumphs over wrong and I think this is bigger than Bre-X and this is a wrong that is in bad need of correction.

And hopefully, as we continue this series over the next three weeks it’s going to bring enough public attention to it either from the mainstream media or it’s going to bring enough attention, you know, like I mentioned I cited a report last week where the underperformance of Canadian exchange compared to the AIM for this very reason and money is now leaving Canada for this very reason because of this activity because people know that this exists. And so, hopefully this is going to go higher up and especially if the media catches on to it and next week as I mentioned we’re going to have a trial lawyer on who specializes in naked short selling and it will tell you what your rights are and we’re going to talk about the legalities of it and what can be done about it and that’ll be coming up next week. [50:54]

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

Part 3

Q-Calls

JOHN: Time for the Q-lines here on the program. Q-line meaning question line, and our Q-line is open 24 hours a day to take your calls and comments. We ask, number one, that you keep them short, keep them under a minute, make them to the point and when you start out, just give us your first name and where you're calling from, that's fine for us. We like to know where the listeners are splattered around the globe. And our toll free number from the US and Canada is 1-800-794-6480. That number does work from the rest of the world, but it's not toll free. It's only toll free in the US and Canada.

And as we answer your questions, please remember that content here on the Financial Sense Newshour is for information and educational purposes only. And you should not consider it as a solicitation or offer to purchase or sell securities. And our responses to your inquiries are based on the personal opinions of Jim Puplava because we don't know enough about you, we just have generic information that you provide to us. We're unable take into account your suitability, your objectives or your risk tolerance. You should always consult a qualified advisor who sort of thinks in the mold that you do and understands your objectives before you invest in anything. And as such, Financial Sense Newshour shall not be liable to any person for financial losses that result from investing in any information delivered here on the program. Here we go.

Hey Jim and John, this is Rocko, New Jersey calling, great show, listen to it pretty much every weekend. Usually my questions are around the metals market, but today it's more around the energy/oil market. And the question today really you’ve got a lot of smart people out there and a lot of different areas of the world. We understand what the problems are: peak oil, et cetera. And yet these road blocks that are being put in place for exploration and development of alternative fuels, especially, you know, different locations up the coast, we're just not getting anywhere, so my question is: We know what the problem is, why can't we fix it? For me it's pretty black and white. I know there is a lot of politics that come into play, but do you think there is a hidden agenda somewhere why we don't produce power own energy off our own shores versus, you know, importing? I just don't quite get it. It's quite frustrating. Certainly on the east coast here, we're starting to be impacted by stagflation. Home prices are going down, tax rates seem to be going up, so it's an ugly situation out here, probably just as it is out in California, but appreciate getting feedback in that regard. A lot of smart people apparently in this world that are involved in these businesses, why the heck aren't the people in the political realm getting a clue and allowing us to move forward to sustain ourselves as far as energy.

JIM:You know, Rocko, the big difference between now and let's say the last crisis in the 70s, number one, are own oil production had finally peaked, so we began to import oil and then during the Yom Kippur war, we were embargoed. So that had a dramatic impact on the US economy. So President Nixon got the Alaskan pipeline passed, overriding environmental lawsuits. We began to take actions to increase CAFE standards, create incentives for energy conservation, and it wasn't until there was enough pain that the politicians began to act. And remember, in the 70s, we had the big muscle cars. By the end of the decade, foreign imports had come in because they were more fuel efficient. Detroit finally got the message, so this takes sort of time. I think one of the biggest road blocks right now is the environmental movement which is trying to stop finding energy. We know where it is and we're not giving the companies access, and they are using the environmental movement to stop it, just like they put, you know, the polar bear on watch as a means to stop drilling in the Arctic; and that same group is going to try to shut down drilling off the shores of California and also drilling in the Gulf of Mexico where we get 40 percent of our energy. So until the public feels enough pain, and believe me, they are feeling pain now, but just wait until the gas lines and the rationing start, and then I think you're going to see a sea change. When it happens, it will be rather dramatic because people will be screaming on politicians and what they are going to want is something more than posturing and holding hearings and “we're going to look into price gouging.” They've been doing this, and they never find anything, but you know, it looks good. It's just political posturing, but more pain first. [4:29]

Hi. Bruce from Oceanside. Just got done listening to your piece with Eric King. Just explosive. I love that stuff. Keep it up. In fact, I would move to make it a permanent feature on the program every week. But anyway, it's time to start naming names, calling out some of these companies up in Canada, brokerage firms, banks, call them out on the carpet and hitting them where it counts. I'm sure you've got a ton of listeners up in Canada who unknowingly bank with these companies, utilizing them as brokers and what not. Start naming names and let people know exactly what's going on. They can go and cancel their accounts and write letters and what not and hold these companies accountable.

JIM:Well, Bruce, one of the reasons we tell people to get like a Level 2 where they can monitor trading in Canadian stocks on the exchanges because you can see who those brokerage firms are, but we're not going to get into naming names because of our attorneys who we're working with now have asked us not to. [5:30]

Hey, Jim and John. This is Dave in Tennessee. I enjoy your program a lot. I listen all of the time. Fascinating. My wife and I, we make it a regular to sit and listen to it. I've got a question about juniors. I'm generally a bullion investor, a physical bullion investor and that's what I generally always gravitate towards. However, and I keep hearing about junior mining stocks and about what – you know, which ones? – there is probably going to be an up swing probably in value in the next few months on that or maybe year. Specifically for somebody that is not really that involved or knowledgeable in that sector of investment, what do you suggest? I mean which particular stocks? I know you probably don't want to get into particulars, but which ones do you suggest? Is there a list of several? I would like to invest in some, but, you know, I'm not familiar enough with the sector at all to even begin to know where to look. Or as far as you said do your research and that sort of thing, but I don't know what to look for. I would like to get involved, but sometimes you have to address these things on a beginner level on that sector, and that's where I'm at. So any help in that regard would really be appreciated.

JIM: Okay. Well, there are a couple of things that you can do and that is, Dave, you can go in a mutual fund where the mutual fund manager is very knowledgeable and may own, you know, some juniors. That's one aspect. If you want to do it yourself, there is a couple of things I'd recommend. There is a book out is there published by The Northern Miner. It's called The Layman's Guide: Mining Explained. It will give you good background, what to look for, a little bit about mining that will make you more knowledgeable. And then what I would probably do is maybe subscribe to some newsletters that cover the sector by newsletter writers that do not get paid in options to promote a stock. You know, a couple of names would be one of the experts we have on the program John Doody's Gold Stock Analyst; the Coffin Brothers, Hard Rock Analyst has a newsletter; and The Ormetal Report. These are all newsletters that receive their compensation mainly from subscribers so they are not getting paid by the companies themselves to promote, so a couple of ideas for you. [7:50]

Hey, Jim. This is Barry calling from Los Angeles. Thanks for the great show. I have a question about something that I hope you don't laugh at, but the idea of abiogenic oil which means oil that is made from deep inside the surface of the earth as opposed to being the result of fossil fuel. I'm wondering if you could perhaps either comment on that or bring an expert on that could argue that there is abiogenic oil, and what the consequences would be if it were true that oil originated in an abiogenic way.

JIM: You know, I've looked into it and I just don't buy it. If it was really in existence, then we wouldn't have seen peak production in the United States. In other words, oil would replenish itself. You're probably looking at a book that was written in 1999 calmed The Deep Hot Biosphere by Thomas Gold. He was one of the ideas people promoting that concept. I just don't buy into that concept. Otherwise, Ghawar, Cantarell, all of these fields wouldn't have peaked and our production wouldn't be struggling like it is today because it would just basically replenish itself. [8:59]

Hello. This is Marcy calling from Bratislava, Slovakia. I'm interested to know the impact of plastic production on the use of oil. It seems it could be a trivial amount and yet I've read that it takes 685 gallons of oil that's equivalent to one ton of recycled plastic. I live here in central Europe and I see the about ten fold increase of packaging and plastic bags and all of this other kind of waste, so I am assuming that this plastic usage is up worldwide. I wonder if you have a comment or could find out a little bit more about the impact of plastic production on oil usage.

JIM:Oh, Marcy, calling from my home country. My parents were born there. You know, plastic is a by-product of oil and as you see it either at the grocery store or packaging in the store. You know, I don't have that statistic offhand, but obviously, you're seeing plastic costs go up and food costs go up. Not only in terms of the energy to produce it, but also even in the packaging. [10:11]

Hi Jim, this is Craig from south Louisiana oil country. I want to say you have a great show and I would just like to make a comment on peak oil. I've been in the oil fields for 30 years all over the world, Alaska, Canada, all over the United States, Mexico, into South America, all over Venezuela, India, China, all over the Middle East and three years ago I thought peak oil was a bunch of dinosaur dung, I guess, and today, I still don't believe in peak oil, but I do believe in peak production. And the reason behind that, I think the world’s oil that we've depleted our gas caps and can not keep up with production today at 75 or 85 million barrels a day and your listeners I don’t know if they can concept how much fluid that is per day, but anyway, I know they ain’t gonna make it now.

JIM:Well, Craig, I think we're seeing peak production, peak oil, whatever you want to call, unfold here as we head to – I believe we'll see close to $150 oil. Our forecast is 145 this year. [11:26]

This is Winston from Virginia. The question I have is: If you have money in a 401(k) that’s invested in the general equity market kind of across the board with the equities, would it make sense to take your money out of a 401(k) now; and since this is the perfect storm the thing with the junior miners and all ready to take off, would it take sense to take the money out of the 401(k) and put it into something that has real potential to grow here? Like, I know you guys offer with all of your normal caveats and all of that, you also have a junior mining fund or something to invest in in oil and gas and things that have more potential than the general equity market. Just wondering if that would make sense.

JIM:You know, Winston, the first thing I would look at, whoever you're working with, the company and the 401(k) to see if you can get something in terms of alternatives like some sector funds, a natural resource fund, an energy fund, a foreign currency fund, foreign bond fund. I mean if you don't have those kind of alternatives, you know, then maybe you might want to take some money out or reduce your contributions and start putting it on a monthly basis into some no-load mutual funds that invest in the same area. So rather than just cashing it out immediately, I would look at some alternative first that let's say your fund administrator can get those funds added, especially if a lot of other people ask for it. If you can't, then maybe cut back on your contribution and use the savings that you're not putting in the 401(k) and then put it in the mutual fund at the personal level. [13:07]

Hi Jim and John. This is Jack in Illinois. First want to thank you for your program and the service you provide to both investors and non-investors. My question has to do with your discussion with Eric King during the first hour of the Big Picture of the May 24^th broadcast. This discussion spent a lot of time talking about the short selling of equities by large investment banks or other entities prior to their IPO and profiting from this activity which is very illegal in this country and is supposed to be illegal in Canada. What I would like to know is whether or not this illegal activity is similar to the allegations of such activity in the silver and gold metals market on the COMEX as documented in the COT reports which Mr. Ted Butler has been documenting for many years? I look forward to your answer. In the meantime, keep in mind this tried and true advice: illegitimi non carborundum.

JIM: You know, Jack, this is a little different than what Ted Butler is talking about. Those short positions actually are actual short positions. This naked short position is basically counterfeiting. They are basically inventing or printing shares that don't exist. In fact, as we talked about in the second hour of the Big Picture this week, there is an actual lawsuit that has just been filed by a company called Taser against some Wall Street firms that aided and abetted naked short sellers and they found out at their annual shareholder meeting where they had a little over 60 million shares outstanding and yet you had 80 million shareholders vote at the general shareholder meeting. So, no, it's a little bit different and it's even worse. [14:55]

Hi Jim and John, Reg from Spruce Pine, North Carolina. On that naked short item or problem, it seems to me all you have to do is ask for delivery. I have 50k of them in margin account. Just give the word.

JIM: You know, Reg, if you have a margin account, I would definitely skip it over to a regular account because if you have a margin account, they can use your shares and loan them out to short sellers, so definitely change it over to a regular account and don't keep it in a margin because your shares are probably being loaned out for short sellers. [15:34]

Hi Jim and John, this is Art in Costa Mesa. In your conversation with Eric King last week you asked us to let you know if we noticed any suspicious activity going on with mining stocks that we own. And first of all, I wondered how would we know and if we do notice something, do you have an email address you'd like us to use. The one reason I ask is that on more than one occasion I've noticed junior pink sheet mining stocks can actually plunge several percent on the same day that the Canadian stock has a healthy gain. Does this sound like manipulation or are the two just completely different stocks?

JIM: You know, Art, you have to be careful with pink sheet trading where the bid spreads are so wide that there may not be some correlation there. Where I like to see it and where I notice it is on the AMEX exchange. In fact, on the Friday as we were discussing the spoil-your-weekend and the end-of-the-day-close manipulation technique, we were watching it occur with one stock that was listed on both the AMEX and Toronto in real time. You know, if you get something like a Level Two that can pick up and name the houses – but that's hard to do on the pink sheets because they don't do that, you can mainly see this with the larger exchanges and especially the Toronto and the Vancouver. You can email us here at Financial Sense. We're going to be building a web page that's going to start documenting all of this and the more input that we get from people like yourself, the better and more powerful this page will be. [17:15]

Hi Jim and John, it's Andy from Winnipeg, Canada. I just wondered if you guys have heard of the Israeli electric car project. You could YouTube it. A very interesting project. I was wondering if you guys could get Shai Agassi on the program and interview him.

JIM: You know, Andy, yes, we have heard of it. I'd love to get somebody like that on the program. But yeah, we're looking at alternatives. We've had somebody on solar, we've had somebody from Toyota. I'd love to get, oh, gosh, I'm trying to think of the name of the electric car – the sport car, offhand, but we're going to try to get somebody from that company. We even actually tried to get somebody on greenhouses from an Israeli company and they had to cancel at the last minute. So sure, we'll try to get them. [17:57]

Hi, this is Curtis from the great Pacific Northwest. I've been wanting to ask this question for a long time. I've listened to you folks about nine months now and I'm kind of an average Joe Lunch Bucket, I work for a relatively large firm up here and have been putting land in my 401(k) just like I'm supposed to over the years and lately I'm completely into cash. The coming gloom in the markets and what's happening to the currency really has me concerned because I don't see any option for me within my 401(k) to really diversify into metals or energy. Like most 401(k)s they only have small caps, large caps; there is a money market fund and of course company stock. So I'd really like to get your feedback on some options I can do. If we are really going to have a currency collapse, all of the money in my money market is essentially going to become worthless, and of course I can always borrow from my 401(k) and I have to pay back with after tax dollars once I repay it and once when I take it out. However, in the face of a currency collapse that would actually be a really good deal for me to pull that out and invest in some of these other options, especially physical commodities, gold and silver. If you are in my position and Joe Lunchbox like I am, what would you do? What would you be thinking? I really appreciate your feedback.

JIM: You know, Curtis, your first base of protection against a currency or devaluation of currency is bullion itself and you say you're Joe Lunch Bucket. Well, you know what, you can start accumulating personally silver. You can go out and buy silver Eagles or silver rounds where the price of silver is close to $18 an ounce, maybe you need to reduce part of your contribution to your 401(k) and maybe start accumulating bullion until you've got a nice position equal to 5 to 6 months worth of living expenses in bullion. Start doing that at a personal basis. And you can start doing it now for as little as maybe 20 bucks. [19:48]

Hi Jim and John, it's Robert from Vancouver. I've noticed that inflationists are consistent in their view than gold and gold stocks can be expected to perform well in the next few years. However, deflationists seem to have a mixed message regarding gold. Some deflationists tell us that deflation is coming, so load up on gold and gold shares. We're told that gold isn’t someone else's liability, so it will out perform. However, other deflationists surprise me by asserting that gold will fall along with everything else in a deflationary environment. I've even read the example of gold stocks performing well in the 1930s depression isn't valid today given the price of gold was fixed by the US government at the time. My question is: Why are there these inconsistent views towards gold in a deflationary environment? Even many inflationists seem to agree that we could experience deflation if the central banks lose control. By the way, I am an inflationist, especially after listening to your interview with John Williams a month ago, but I want to understand what would happen to our gold and gold stock portfolios if our inflationary expectations don't pan out.

JIM: You know, the first thing I think, Robert, you need to understand about gold, it works in an inflationary environment as a hedge or protection against a depreciating currency; and it operates and does well in a deflationary environment where, you know, in a deflationary environment, you have a contracting money supply, you've got credit problems, the banking system is in trouble and that's why gold is not a liability. There is no liability side to gold, so that's why it operates well in either an inflationary or deflationary environment. Because when you boil it down, gold is real money, it's been that way for 5000 years. These episodes where we go to a paper system like in the 17th Century or like we've done the last 30 years, in the end the system will collapse of its own. Now, getting into stocks, stocks can do well because the miners that produce the stuff can make a lot of money when the price of gold is going up and you may not be able to get gold or have access to it and that's why a lot of times you'll see the mining companies go up in value because remember, if you're a mining company and you're sitting on top of gold and gold goes up two, three or four fold, your assets are worth more. Plus when you're mining this stuff, you're making a ton of money as you mine it, so that's why it can go up. [22:25]

Hi Jim, Hans calling from Oregon, Wisconsin. A couple of comments. First I think you're doing your readers a disservice by hammering on the theme of there being a lot of undeveloped oil reserves in the United States. If you go and read an article at ASPO-USA written by Professor Roger Blanchard, this goes right to the point. We've poked a lot of holes into this country. There just isn't vast amounts of oil out there. And I think it's a disservice to the American public to hammer on that theme. The second thing is you keep talking about clean coal. As far as I know, nobody has got the technology to sequester carbon dioxide from power plants in a major way. In fact, I think funding for the Future Gen project or whatever, it was recently pulled, so repeating again and again clean coal on your program doesn't make it so. Your program is really good in a lot of respects, but some of the things you hammer on don't seem to correspond very well with reality. So, thanks for listening.

JIM: Hans, I'm going to disagree with you on that. In terms of we know we have oil in the North Slope and ANWAR. We know we have oil off the shores of California. I have never said that opening this up is going to make us energy independent. What I'm saying is we're getting to a point where oil supplies are getting scarce. We're going to have to have a transition period between now until the time we come up with alternatives whether it's hybrid cars electric cars, fuel cells, building nuclear plants etc, because this is a liquid fuel problem. Our transportation system, the stuff you see in the store all got there through energy. And to ease into this transition period, we're going to need something. We may be at peak exports, so I'm not trying to give the impression that well, gosh, if we drill off California or open up ANWAR we're going to be energy independent. We'll never be energy independent from oil again, but it is going to help. We're going to need something or some kind of supply to ease us to the point so that we can develop into a transition. In terms of clean coal, we're working on it. And if enough energy and the technology and money and research is put behind it, we'll come up with a solution. So I don't think I'm doing a disservice. I'm just talking about what is out there that we're looking at that may have the possibility of working and especially when we have a large supply of coal. [24:56]

Hi John and Jim, this is Robert calling from Oklahoma. I noticed a review in the US Securities and Exchange Commission's regulation SHO list from May 22nd that Tyhee has spent 18 days consecutively on the list. I wonder if you could address what this means what's going on in terms of the investment community’s activities regarding this stock.

JIM: You know that means that there is a lot of short selling that's taking place in Tyhee right now and the people that are selling it short don't have the shares so they are selling counterfeit shares in the market, and it's been under attack by the hedge funds and some of the brokerage community. And what they are doing is they are selling a lot of shares in the market and these shares don't exist. [25:45]

Hey guys. Keith from New Jersey, I’m sort of new to your program. I appreciate it very much. Very informative. I'm trying to get things on track financially. I have a question regarding BullionVault and GoldMoney. What are the pros and cons of the usefulness of those two systems in the future with the collapse of the dollar? I just can't get my mind wrapped around what actually will be the usefulness. Of course the value will be there, but the practical application of it when things do begin to collapse.

JIM: You know, it's just another way whether you're talking about BullionVault or GoldMoney, it's another way of owning assets, gold and silver bullion offshore. And you never know what governments are going to do, and it's just another means of diversifying your bullion holdings. [26:42]

Hello, guys. This is Roger in Houston. I was wondering if while we're not having a currency devaluation now, there's the Bank of America stock which has really fallen down even more dramatically than the failure in Bear Stearns, I think it was. And there is an article about the bank failures possibly coming on-line. I was wondering during a bank failure and with gold, with a safe deposit box in Bank America and it fails, disregarding a currency failure is should I go out there and be getting that stuff out of there? I mean can you get in a bank that's failed just to your safe deposit box and I guess that's the question? I know in a currency devaluation, you probably wouldn't be able to, but I'm wondering just a bank failure at Bank of America if I should consider taking the gold out of the safe deposit box.

JIM: You know, if it really starts to get bad, it's something you may want to consider because if they were to go under, I don't anticipate that, they are almost too big to fail, you would have the Fed chopping down every tree in the forest to keep them afloat. So at this point, I don't think you need to worry. [27:58]

Hi Jim and John, it's Mario from Canada here. Just two quick questions. In regards to this short selling, when did this all begin? It seems to me if you invest in a stock, you know, you buy it and you sell it if you like it, you buy it; if you don't like, you sell it. That is an investment program, but with the short selling, it seems like it's turned everything into more of a gambling format. So when did this all start and is there a possibility that they could discontinue shorting. And number two, quick question, these ETFs, it seems to me it's a lot more viable to put money into bullion. The ETFs, is there ever any possibility that they could not have the bullion in the actual place that they say they do and that your ETFs would become worthless, or there could be a scam or somebody could cook the books so to speak?

JIM: You know, Mario, there is nothing wrong with short selling. You've always been able to short sell. Actually, short selling can create liquidity if it's done on a legitimate basis because eventually short sellers have to cover and that brings in liquidity in the market. What has become criminal lately is where people are actually shorting shares they don't own, so what they are doing is actually counterfeiting shares. And that's something that we've seen. It's been going on on the Canadian side for a long time. You see it a lot with the junior mining sector. It's done over here. I mean the Friday that I'm answering your question, there was a law suit filed with Taser against some major Wall Street firms regarding naked short selling and it was discovered at the annual shareholder meeting. Taser’s stock is down 50%. It was taken down through naked short selling and you had almost eighty million people vote in the shareholder meeting with only sixty million shares outstanding. So that's what's wrong with that. In terms of ETF, could it not be there? I've read some stories about that. I prefer owning bullion. I think the ETF is more appropriate for someone who wants to trade in and out of a sector. If you're an investor, I would definitely own the bullion. [30:12]

Hi Jim, this is Tony from Toronto. I just wanted to make a comment about your campaign against shorting and naked shorts. I think it's a great idea. Maybe you could do something like Ted butler does and post a letter on your site that us investors can send in to our regulators. I know in Canada you're going to have problems with each province has their own commission. We had to get the United States government to prosecute Conrad Black. You couldn't even do it in Canada. To this day, he hasn't been charged. So I don't know. Good luck.

JIM: Well, we're not giving up. We do have the Canadian and the SEC site, and you are right. In fact, there was an accounting firm in Vancouver where I was told by somebody very knowledgeable where the SEC went in there and made them fix their merger and acquisition department and create a Chinese wall because of the potential conflicts there. There is another lawsuit that is being initiated in North Carolina and this is something that we'll be addressing. We'll be coming up with a web page and then of course next week we hope to have somebody that's an expert from a legal firm on this on these law suits. And that may be part of the answer is lawsuits brought here in the US because pretty much, I have been told by people that they are untouchable on the Canadian side. [31:31]

Hi Jim and John, this is Bob from San Clemente calling. I heard during the Q-Line last week you mention shorting the treasury bond. Also Paul van Eeden mentioned that in a article last week. I'm just wondering what would be the best way to do that. Would it be shorting the ETFs or shorting the futures market? I'd also like to know when is this going to be a good time. What will the sign posts be in order to let us know what proper time to begin these shorts is?

JIM: Be real careful in the future's market just in case it doesn't go as planned because then you would have to post more margin. I know Rydex has a fund that is short the US Treasury market, so that would probably be one of my favorite ways to do it. And I would be more inclined towards the fall where I think higher inflation rates are going to be driving long term interest rates upward. [32:28]

Hi Jim and John, this is Dilip from Santa Clara. Jim, I noticed you've been talking about food as a sector to invest in during the past few months particularly. So looking at the ETFs in the food sector and I noticed a few. The DBA ETF has soybean, corn and sugar as it's main component and then I looked at one more ETF which is MOO which has stocks like Monsanto, Potash and Deere company and so on. Then I saw one more ETF, PBJ that has companies like McDonalds, Anheiser Busch and EM Bryant and so on. So looking at these ETFs, they seem to be going kind of further up the food chain so to speak. So where would you draw the line? Would all of these ETFs qualify as food ETFs or would you prefer investing in the actual commodities in which case the DBA would be the only ETF that really qualifies as a food ETF.

JIM: Dilip, I like them both. I like DBA where you own the commodity itself and then MOO where you're owning the companies. I like a play on both. I mean actually, if you look at year to date performance, the DBA is up roughly about 8% and if you look at the MOO which is the companies, it is up about 9%, so close correlation between the two. I like those two both. [33:53]

John and Jim, Jim and John, this is Chris from California. I haven't called in a while, but I have a quick question. Hopefully it's quick. It's kind of two part. About a week and a half to go, I was reading about Bernanke petitioning to Congress about the Fed paying off the interest on bank reserves. Can you explain what constitutes bank reserves and what and how Bernanke's proposal will affect us and the economy?

JIM: You know, Chris, what he's trying to do – each bank is required to he keep reserves based on deposits with the Fed. So the Fed is talking about paying interest on that. They are trying to reliquify the banking system and make it profitable, especially now since they are losing so much money. [34:31]

Hi my name is Shura from Canada. I really enjoy your show. I just wanted to ask a question. There is this book called the Great Depression of 2006 where they talk about the credit, oil, crude oil bubble trouble. I was wondering if you could take a look at it. And they argue that there is oil is a speculative environment. Do you agree?

JIM: I haven't read that book. I disagree with them in terms of speculative environment. In a speculative environment you would see rising prices with excess supply, and that's certainly not the situation we see in the world today with oil where daily demand exceeds supply by nearly two million barrels a day. [35:19]

Hi Jim and John, thanks for the show. This is Kevin calling from Central California. I listen to your show – I have a long drive to work and as I was listening to your interview with Michael Panzer, I'm thinking, just forget the Maalox. I'm just going to turn around, skip work and start drinking – alcohol that is. Any how, just kidding. As I was listening to the show, I was wondering what you thought of an investment idea. I'm thinking as soon as I get to work I'm going to Google fire arms, home safety manufacturers. Perhaps that would be a great investment to invest in that for everything that’s falling apart. You said to prepare yourself. I think that's going to be a natural place where people are going to go to a Walmart, but it's probably all made in China any how.

My question this week is: If you had one area, one specific area – I think I know the answer of this, but one area of energy, water, precious metals, silver juniors – if you could only pick one –the difference was the best bet between hitting the big time and going to happen for sure – what would it be? Because for me I'm just a small guy, I've worked most of my life, probably going to have to but I want to put my investments that have the greatest chance of paying off in the future. So that's the question. If you just had one area, would what would it be?

JIM: I would say that Kevin what I would do – and you say you're just a little guy. The great thing today is I wouldn't pick one area because there are going to be times where you are going to want to own all of them and I'm thinking of writing an article called the dawn of scarcity whether you're looking at agriculture, whether you're looking at water, whether you're looking at energy, whether you’re looking at metals with depreciation of currencies. And you know something, you don't need a lot of money. You can go in, you can find no load mutual funds where you can put a small amount in these funds so you can own energy, you can own a water ETF, you can own an agricultural ETF. You can own a – let me see, a couple of the other areas –a metals ETF or even a metals mutual fund, so you can be invested in all sectors. You can be in metals as bullion and you can even be in metals as stock. So I like them all and you don't need a lot of money to be in all of them and I would prefer to see you invest in all four or five areas. [37:45]

Hi guys, Rob from Santa Clara. Jim, you mentioned that answer to a call last week that during a coming crisis window you expected a flight from bonds and treasuries; you talked about going short interest rates. This seems to be a pretty severe prediction given the role of treasuries as perhaps the most stable of all investments. I was wondering if you think you might elaborate a bit on how that could play out and whether the risk adverse money might go to other than a flight to precious metals –gold and silver – when we hit that period and there is money pulling out of treasuries.

JIM: What I'm looking at as inflation rates go up because there are so much monetary stimulus that's baked into the system and I think that's going to drive interest rates. I mean right now the play is –and you can almost see this – the stock market goes down for a week and then interest rates rally, the stock market starts to go up and then the bond market goes down. And so that's sort of the first choice right know. But I think it's going to begin to dawn on people as we head into the fall with higher consumer prices, higher inflation rates because right now, we have negative real interest rates and I think that's what's going to cause interest rates to rise. And people realize as we have talked here on the show when I've interviewed – in fact, just listen to the interview of Jeff Christian this week on the silver market where you've got global buying of not only silver and gold at record levels in for probably the third time in half a century, silver investors have turned into net buyers instead of sellers. And that's what I think – it's finally beginning to dawn on people this is global, currencies are depreciating against real money. It's starting to catch on. It began with the smart money and I think it will continue and I don't think you've seen anything yet. [39:27]

JOHN: Assuming Jim that we do not run out of energy, we will be back on the air next week. [voice trailing] I think we just ran out.

JIM: Ran out. You ran out of energy? It's late Friday night, folks.

JOHN: What are we going to do for next week's show as we get more energy back into the show.

JIM: Next week Warren Brussee will be back with me. He's got an updated version. His new book The Second Great Depression. Also on June 14th, Louis-Vincent Gave, A Road Map for Troubling Times. Michael Klare will be my guest on June 21st, Rising Power, Shifting Planet and Richard Bitner, Greed, Fraud and Ignorance on the credit crisis. And Marshall Goldman, Petrostate on July 5th. And so lots of great stuff coming up and then let me see, we take off in August and we're going to do a couple of special things, and also a few things in the fall. Lots of news coverage, the presidential conventions with the Democrats are in, what is it, July, August, John, is it August?

JOHN: The Democratic convention is in August and I've been asked by one radio network to go and be there to cover it, so I don't know.

JIM: So you're going to be covering it.

JOHN: Well, we have to get press credentials and see if that works out.

JIM: Are you a super delegate?

JOHN: No. I’m not a super delegate.

JIM: Okay.

JOHN: So we'll see. That's still not totally locked in, but we're working on it anyway right now.

JIM: Okay. So that's what's coming up next week. 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.