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Financial Sense Newshour

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June 14, 2008

Part 1

Commodity Bull Market: Higher Prices Ahead

JOHN: I'm only online assuming I pushed the right button. Welcome back to Financial Sense Newshour, Jim Puplava and John Loeffler here with you. Well, once again, the moral argument surfaced. A lot of times, we hear that coming out of Congress. And let's face it, laws do have moral implications; law is simply the formalization of what a society believes to be moral or immoral, to a certain degree that's involved in there. But as we heard this week off the street, in terms of commodities – and every time somebody makes a moral argument, you have to hold your breath because the implication is, okay, now that you've made a moral argument, what are you going to do to solve this moral problem? So when somebody in Congress like a politician says something to you such as we're going to do XYZ program, you have to ask a series of questions: 1) what does that mean? A lot of bad bills have been down with nice sounding titles, for example. 2) How will it be implemented or enforced. That's number two that you need to ask. 3) Is it voluntary or mandatory. Now, be careful because a lot of quote voluntary things nowadays have all of these strings attached that if you don't go along with it, it really isn't voluntary because you are going to be in a world of hurt. You don't have to, but if you don't go along with this, this is going to happen to you. And 4), here is the big part –who is going to pay for it?

So we heard the voluntary argument again this week about whether or not the public should be allowed to invest in commodities. And you have to put this against the backdrop of the fact that Congress, for example, has driven the price of food and other commodities up, if we're making a moral argument. About a third of the corn has now been converted into ethanol by congressional fiat and the farm bill which failed last week was going to earmark about 30 billion dollars to farmers not to grow food, as we're barreling into a food crisis.

And at the same time –speaking of crises – we have the oil crisis and they were debating a bill as far as global warming is concerned to make energy prices even higher; and they always fail to point out that the highest profiteer at the pump tends to be state, federal and local government. Is it moral to allow the public to invest in commodities? And you really have to shake your head at this one. In listening to debates over the last couple of weeks –everything from global warming, to where we stand financially – there is so much noise out there, I don't think the average person can make their way through this, unless you know what you're doing. [2:42]

JIM: You know, it's amazing because when they frame the debate [about] America's oil crisis, what they are putting out is noise and they are not simplifying it with facts – whether you're looking at peak oil, whether you're looking at the rise in commodities. And that's what we're going to do in this first topic that we're going to cover today which is the commodity bull market: Higher prices ahead.

And some of the stuff that we're going to be referring to is the Commodity Research Bureau which publishes the CRB Commodity Yearbook. It just came out for 2008, which is really the figures for 2007. And what is remarkable about this, if you take a look at the previous bull markets in commodities, especially in the 70s, we had two runs. We had a run from 1971 to 74, and then we had another commodity bull market which was from 1977 to 1980. And the largest bull run in the 70s was from 1971 to 74 where you saw the CRB Index and commodity prices go up almost 147%.

And everybody remembers the 70s: Oil prices were going up, you know, collectibles, real estate, Chinese ceramics, anything that was a tangible good as the dollar began to lose its value as it went off gold backing and the government began to inflate the money supply. We began to run budget deficits because when the dollar is backed by gold, governments couldn't do that; they had to balance the books. So there were sort of handcuffs placed on government in terms of limiting the amount of money that they could create or the amount of depreciation. Now, what has caught the market by surprise –and it's no wonder – is that the CRB Index from 2001 to 2008 is up 200, almost 211%. That is the largest bull market in post war history beating the previous record from 71, 74. And beating also the bull market that occurred from 1977 to 1980. That’s because what we had was in between those two bull markets, we had a consolidation period between 1975 and 76. Especially after the stock market went down, money went back into the stock market for a brief period, for a two year period; you had gold correcting during this period and commodities in general.

But what people are looking at is – John, how many times have we discussed on this program over the last, what, seven years now, is they are always looking for something other than the cause. Oil went from 20 to 30 as we have mentioned. Well, it was the war. And then whether it went from 30 to 50, well, it was terrorism. When it went from 50 to 70, well, it was the hurricanes. It was weather. When it went from the 70 to 90, it was the dollar. Now that it's gone from 90 to 132 –we're doing the show actually on Thursday because I'll be out of town on the weekend – but we're looking at 132 and actually, oil hit almost 138 dollars this week, and so now it's the speculators.

But I think what has grabbed the markets attention is that no matter where you're looking whether you're looking at energy prices, whether you're looking at agricultural prices, this is what is just blowing people away: West Texas Intermediate crude prices are up 38%, Brent crude prices up 43%, natural gas prices up 75%, coal prices up 26%; uranium prices are the only thing that's down this year, down 33%; gold prices up 1%, silver prices up 9%, platinum prices up 32, aluminum up 21, copper up 19; corn prices just hit a record – we are now at close to 7 dollar corn, up 55%; ethanol prices up 25%; soybean prices up 28%. And people are saying, “well, it's the speculators.” [7:03]

JOHN: All right. So how do you turn that though? In other words, what would the proposals do if we were to start implementing some of these about not letting people invest, and how do you an address like that when they say it's the speculators?

JIM: Well, look. When you're in a commodity contract, you have two choices: 1) you sell your commodity contract before it expires; 2) or you just roll it over into another contract. And remember, for every person that goes long a commodity contract, there is another person on the other side of that trade is going short the commodities contract. Now, if speculators were sitting there like, let's say, John, you and I were getting involved in commodities investing and we said, “you know what, we're going to buy crude oil and we're going to take delivery of a thousand barrels.” You live out in the country, and all of a sudden you're stocking your barn with oil to take it off the market, then, yeah, okay, we're hoarding oil as speculators; but if you try to limit people's ability to invest in the market, then what happens, it will go elsewhere. In other words, right now, you've got oil trading in the US and London. Now, you have another oil market opening up in Dubai. You have another oil market that will be opening up in Iran. There is talk of opening up oil markets in St. Petersburg. There is talk of opening up other oil markets in, let's say, Caracas. And remember, there is a huge flood of money around the world today that operates offshore. And so if you tell a guy, look, you can't buy oil futures in the US, or we're going to limit you, guess where that money is going to go? It's going to go elsewhere. And danger to the US is if we lose pricing of commodities in dollars and the dollar is no longer used in commodity transactions, then we're really in deep doo doo because with the dollar falling, if we had to pay for oil in Euros or Yen or in gold or some other price, then the full effect of our depreciating currency would drive prices up even more. So this is just the first stage, John.

The next stage, as prices continue to go up, is going to be wage and price controls, so they are going to start putting in price controls; and as we know, what happens when they do that, it creates shortages. And so all of this is going to backfire, but nonetheless, they will still continue to do that. But we have on the day that you're trading in the futures market corn prices hit $7.34 cents, up 17 ¼ quarter cents, up 2.4%. We have cocoa up 2%. We have natural gas up 1.3%. [9:46]

JOHN: Let's talk about the progression of a bull market and show people what normally happens in this type of situation. This gives some perspective behind everything that is happening.

JIM: The dollar peaked in December of 2001. The Dollar Index was roughly about 121, actually, it peaked in July of 2001and the exact figure was 120.9. So since that period of time, the Dollar Index has fallen from 121 down to a low, actually in April of this year, of 71. So in the 2001 to 2008 commodity bull market, there was a progression of factors. In the first three full years of the commodities bull market –and that's between 2002 and 2004 – the commodity rally was driven mainly by a 33% plunge in the dollar. And if you look at a dollar chart, you can just see that from the end of 2001, all of the way down to 2004 when the dollar index dropped from 120 down to roughly about 80, that was the first leg. In commodities, since the real assets typically rise in price when the currency in which they are quoted depreciates in value and that's exactly what we saw. We saw one-third depreciation in the value of the dollar and so people started saying, “well, look, the dollar is going down, how do we protect ourselves?” And there was a movement into commodities. [11:20]

JOHN: But that's what they are saying is causing this today. You know, the fall-in-the –dollar-type thing.

JIM: Well, we'll get to that. I mean that's a little bit late, but I mean if you take a look at the dollar has only fallen about 7% here since the beginning of the year, so that can't explain the entire movement.

But anyway, getting back – the first phase of the commodity bull market from 2002 to 2004 was driven by a drop in the dollar itself, a one third drop in its value, money shifted into commodities.

The second phase of the bull market really began to heat up as global economies began to accelerate at the same time between 2003 and almost to last year, when you had all of the economies around the globe –the US economy, the European economy, the Asian economy – all began to accelerate. Global growth was growing somewhere around 5%, but most particular to that growth rate was that strong commodity demand from China took over from the dollar as a major factor driving commodity prices. China's economy began to grow at 10, 11% which created a huge enormous appetite for energy, demand for industrial metals, from steel, to copper, construction commodities – all of these were key factors driving these sectors higher.

In addition to this strong demand, the other thing that we saw which we're still seeing today, is production supply in those sectors could not keep up with this new demand because of years of underinvestment. I mean when you don't invest in the discovery or building of new mines, or you don't go out and invest in finding new oil (because remember, we were in a two decade long bear market in commodities) what happened is the industry consolidated, it constricted and a lot of new supply did not come online. And John, you know, you just can't flip on a switch and all of a sudden oil flows out of the tap or all of a sudden you have enormous amounts of commodities, from copper – and what has happened is there was a lagging period of time where new supply from both OPEC and non-OPEC producers –precious metals were also boosted by lagging mine production – a flood of cash into new exchange traded funds –the ETFs. Grain prices were boosted by drought in the wheat growing areas and by a surge in demand for corn from ethanol producers.

Just as they are making the argument right now is it immoral for investors to invest in commodities, one can turn that question around. Is it immoral to take one third of your corn crop and turn it into biofuels? There is even a bigger question that nobody is talking about. [14:10]

JOHN: Not to mention in the farm bill which failed last week, Congress was going to pay farmers 30 billion dollars not to grow food in a time when as we already discussed here, we have a growing food crisis.

JIM: Yeah. So is it immoral for governments to take a third of the corn crop and devote it to biofuels and is it immoral for the government to pay farmers 30 billion dollars for not growing crops?

JOHN: You know, as I mentioned at the beginning of this whole conversation we're having here, morality is quite frequently invoked as a means for doing something or not doing something, but quite often, the results of what policies are, especially rapidly made policies, are rarely acknowledged. There was an article in the Wall Street Journal on June 10^th: “food crisis forces new look at farming, poor nations and their donors now rethink emphasis on free trade.” I want to read a couple of paragraphs from this article:

The food crisis has also contributed to a major rethink among the advice givers. Institutions such as the World Bank and International Monetary Fund are once again treating investment in poor farmers as a promising development strategy.

Now, why didn't they do that all along?

Since last week in Rome World Bank President Robert Zoellick told an emergency United Nations summit on the food crisis that boosting developing country agricultural productivity and reducing hunger were top priorities for the bank. There was a study that was done in 2007 called Down to Earth by World Bank economists, Luc Christiaensen and Lionel Demery, and they found that the growth of the economic sector is at least twice as effective at reducing poverty as any other sector.

Now, another paragraph from the same article:

Many development economists applaud greater investment to agriculture. Still they worry the food crisis could lead countries to make policy decisions that may make the overall situation worse. Some nations like India and Vietnam have slapped export restrictions on products like rice to ensure domestic supplies. Moves that exacerbate the crisis elsewhere by distorting prices and raising tariffs, for instance to protect local markets would only raise prices further for consumers. [16:30]

JOHN: Now, what happened before? Remember, the advice was from the World Bank that these developing countries should move out of agriculture and move into some other area. Well, as governments in Africa, for example, got out of the business of seed, fertilizer and grain marketing, an unprepared private sector failed to fill the gap. In Ethiopia for example, the government liberalized grain markets in 1990 lifting restrictions on private trade after 15 years of a virtual state Monopoly, so there was a vacuum. But it says here, “private entrepreneurs with too little access to financing couldn't provide enough fertilizer and seed to farmers. Nor did they have the means to store and move vast volumes of grain. Only recently has the world bank acknowledged the damage caused by its advice.” So this was a government caused problem. [17:15]

JIM: And this is the thing that is never brought up in the debates. I mean I was watching this debate on one of the cable channels, “well, it’s these greedy speculators.” And we're going to get into that when we get into the Four Phases of Inflation, how you've got to find a culprit, you've got to shift the blame because there is a psychological rule because government cannot admit that it's causing the problem because it makes it look bad.

But John, getting back to these three phases of the commodity bull market, we're in phase three right now, which, you know, if you take a look at the CRB Index it began about mid-2007, and that started with the meteoric rise mainly triggered by the Fed’s aggressive easing in monetary policy where they brought the federal funds rate down by 3 ¼%. As everybody saw these global inflation rates rise across the globe –and I'm just going to give you an idea of how bad its got: in Venezuela, our friend Hugo Chavez, the inflation rate in Venezuela today is 31.4% and they have food shortages; in the Ukraine, the inflation rate is 31. In Sri Lanka it's 26%; Vietnam is 25% and Egypt it's 20%; Kazakhstan, 20%, Pakistan 19%; Latvia, 18%; Bolivia 17%; Serbia 16; Russia 15, Bulgaria 15, Iceland 12; Lithuania 12; Costa Rica, 12; Estonia 11; Oman 11; South Africa, 11; Turkey, 11; Saudi Arabia 11, Indonesia 11, Guatemala 11. And then I can just go all of the way down the list. We're seeing this as a global phenomenon, as money is being devalued against real money which is gold and silver, and you see this reflected in the price of currencies which are all falling against gold. [19:09]

JOHN: Well, you know what we're hearing is that this is a bubble and we've got a downside correction going here. Some people are saying this signals the end of where we're running, but you seem to think that the prices are going to continue higher.

JIM: Yeah. I mean a lot of people are talking, “well, the reason the prices are coming down is the US is in a recession and growth is slowing worldwide as central banks begin to raise interest rates.” However, if there is a downside correction in commodity prices, if anything else, John, it's going to prove to be a buying opportunity, because fundamentally, the big picture remains the same. The key elements of a commodity bull market remain in place. 1) Strong demand for years to come. And even the UN admitted that we are in the end of cheap oil and we are at the end of cheap food. Demand will continue from such countries as China, India, the developing world. 2) There's lagging investment in developing new commodity supply. Everywhere you look, stockpiles of copper, stockpiles of grain – and we'll get into this in just a moment, are falling. And 3) the dollar is likely to remain volatile in the coming years due to an outsized US current account deficit – half of our deficit now comes from energy. And is there any likelihood that the US will stop importing more oil? No. Oil production in the United States is falling year by year. We'll get into that in just a moment.

So if prices do pull back whether it's in metals, whether it's in energy, all of that is simply going to be a correction because the fundamental factors that are driving higher commodity prices are all firmly in place and none of that will change. [20:58]

JOHN: But all we're hearing right now from CNBC is that we're blaming the prices of oil, the high price on speculators, but that really isn't it. We go back to the fundamentals for really what's driving things.

JIM: Yeah. We have talked for seven, eight years now about peak oil. I mean, the one thing that is very difficult for people to understand is that they impute reserves with production flow. Peak oil is about the rise and fall of oil production, and oil production is falling. And this goes all of the way back to Hubbert back in the 50s who predicted that oil would peak in the United States in 1970, which it did; and he said his forecast for peak production in the world would be 2006. Well, in 2005 in May of that year, conventional oil production peaked and it's been falling ever since. And as T. Boone Pickens – we played the clip last week where he said “it gets down to this, you've got 87 million barrels of demand, 85 million barrels of supply.”

We talked about in earlier programs our major oil fields are aging. We're down to only four fields that are producing over a million barrels. And probably in the next two years one of those fields, Cantarell, will fall below one million barrels, and we'll be down to three fields that are producing a million barrels a day. So the world’s major oil fields are aging and depletion is falling faster than new supply can come online; also, new production is mainly coming from lower quality reserves with higher production costs.

Just take a look at what it cost companies to produce a barrel of oil out of the oil sands or Venezuela, the Orinoco region, or in the deep waters in the Pacific or the Gulf of Mexico or in the Atlantic. And another factor is we stopped discovering what we consume over 20 years ago – we haven't been able to replace it. So even today, oil is still the cheapest liquid that you can buy. You're going to spend more per ounce to buy coke, to buy water, to buy observe juice, to buy milk, so even at today's prices of $136 a barrel, $135 a barrel, oil is still cheap.

And something that is occurring now that we have not seen in a long time – usually, if you look at the futures market, you've got the commercials and the non-commercials, and usually when prices are rising, commercials start going short gradually. The higher the price, the more short positions they pull on. Conversely, when something starts to fall, like when a price of a commodity starts to fall, that's when they start adding their long positions. Well, we're seeing something that we haven't seen in a long time when it come to the commodities market with the commercials. There has been an unusual surge in commercial buying in commodities recently, unusual because it's been on a scale-up. Commercials typically are what we call they operate under negative feedback. They’re negative feedback operators who buy typically as prices weaken and they sell as prices rise. And this scale of commercial buying raises the possibility of a full blown commercial capitulation to the bull market move in commodities. So this is something to keep your eye on because we haven't seen this in a long time. [24:32]

JOHN: Why don't you give us some examples of the fundamentals. I know you've been looking at the CRB Index lately, but if we have to explain this and show this in a way that's really understandable.

JIM: If you take the grains, for example, barley is now probably the world's fourth largest grain crop after wheat, rice and corn. Most barley is planted in the spring in Europe, Canada and the United States, but barley grain along with hay, straw and several buy products are used for animal feed. And, John, world exports of barley between 2006 and 2007 fell by almost 11 ½% year over year. So not only has production fallen from 1998 to 1999, where world production of barley was like 135, almost 136,000 tons, it's fallen now to 132,000 tons. And the other thing is if you look at beginning stocks of barley at the beginning of the year in 2001, we had 111 million tons of beginning stocks of barley, we're down to 68.9 as we enter into the 2007 and 2008 era. So there is just one example of what's happened to grain.

When it comes to any kind of grain –whether you're looking at corn, whether you're looking at soy beans, whether you're looking at wheat – it's all fallen to the lowest level that we've seen since they began to record this going back to 1960.

If you look at, for example, copper, which is probably one of the most widely used industrial metals because it's not only an excellent conductor of electricity but also has strong corrosive resistant properties and is very ductile – what most copper today is probably used for electrical uses which accounts for roughly about 75% of copper. If you take the average American home, it probably has 400 pounds of copper. Also, copper is a biostatic meaning that bacteria will not grow in its surface, and you see it used in air-conditioning systems, you see it used in food processing surfaces and actually even on doorknobs to prevent the spread of disease. The problem that you have with copper and on the date that we're talking copper is at almost 3.54 and one of the things the CRB annual book talks about is strong Chinese demand is keeping the floor under copper prices and is offsetting lower demand from the weak US housing market. The International Study Group on Copper said that they are forecasting a 5.1% rise in copper production in 2007, but, you know, the demand keeps going up. Meanwhile, the metals exchange warehouses in London have fallen from almost 365,000 metric tons of copper in 1998, they have fallen down to 216. So here is just copper.

If you take a look at corn – corn is primarily used as livefeed stock in the United States and the rest of the world. And this gets back to the moral issue. In addition to that it's used for gasoline, adhesives, it's used for cooking oil, it's used as a sweetener and you've seen these prices go up. And there is strong demand coming from ethanol producers. John, one third of our corn crop is going to be used in ethanol and then we're paying people not to grow this crop. What you're going to see is a very strong upward price in these grain prices.

I think you and I were talking a while back, you know a lot of people that are in the dairy business, the ranching business. What is happening is they are slaughtering their livestock right now because it's so expensive. So one of the things that we're predicting as we get into the fall, as we get into the dark outer edges of the Oreo theory, is you're going to see meat prices go up, you're going to see pork prices go up, you're going to see chicken prices go up as the price of corn, which on the day that we're talking hit 7.34 a bushel. That means just everywhere you go for these farmers, their diesel costs are going up, their fertilizer costs are going up; and if you're a rancher, your feed stocks are going up. It's amazing.

I recommend if you really want to get into this area and you want to understand the fundamentals of the market, well, the Bible is the CRB year book and I recommend – you can order it on Amazon. The 2008 Yearbook is out. So just one example, when you take a look at production, you take a look at inventories, you take a look at demand factors –and strong demand, supply struggling to keep up, it just tells you, John, that we've got higher prices ahead. [29:24]

JOHN: You know, last week you were talking about a new book that PIMCO has out talking about the new engines of growth; and Bill Gross from PIMCO has a piece out this week that we really need to look at.

JIM: Yeah. You can go to the PIMCO website. He's written a new article and he begins from a quote from Abraham Lincoln that goes like this: You can fool some of the people all of the time and all of the people some of the time, but you cannot fool all of the people all of the time.

And basically, what he is talking about here, and I'm going to read a quote: “we're so caught up in this entertainment world that we're living in that we're more worried about what's happening to Britney Spears and we spend all of our time on trivia. He goes: It's Sunday afternoon at the Colosseum, folks, and all good fun but the hordes are crossing the Alps and heading for modern day Rome better educated, harder working and willing to sacrifice today for a better tomorrow. And he's talking about we're really fooling ourselves with this concept and belief that inflation is under control and he talks about a piece that he wrote back in, I think, 2004.

And he goes: I wasn't an inflationary Paul Revere or anything, but I joined others in arguing that our CPI numbers were not reflecting reality at the check out counter. And he gives a graph in this article and he shows that world inflation rates are today at roughly a 7% inflation around the globe –and I refer back to earlier comments when I was reading inflation rates around the world. However, as the world inflation is at 7% for the past decade, the US inflation rate is only 2.6%. In fact, the most recent 12 months produces that same 7% inflation number for the world, but only 4% in the US. How can the US with its currency down now 40%, with money supply rates growing – it doesn't make sense that the US has an inflation rate of 3 and 4% lower rate inflation than the rest of the world. Can economists really explain this with contorted Phillips curves, output gaps and all of this nonsense that they talk about. We are fooling ourselves. And then it goes on: We're not a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics and the Treasury with rapid turn over to even think of it. I'm just concerned that some of the people are being fooled all of the time and that as an investor an accurate measure in inflation makes a huge difference of terms of where you invest in.

Then he goes on and talks about things that we have written about here, and talked about how they cook the books from substituting owner’s equivalent rent instead of the cost of housing, using things such as hedonic quality adjustments, using things such as substitution and geometrical weighting. And we've been doing this – it's a process that began with Nixon, going all of the way forward with every single American president. We keep changing and modifying the CPI Index, so today we are now looking at a CPI Index that's reported every month that bears no resemblance to what people are experiencing at the grocery store or on Main Street. [32:49]

JOHN: But the bottom line, really, Jim, is how is this impacting people out there because that's where the noise confuses them? They just know they feel the effects.

JIM: Well, a number of things. Think of pensions that are indexed (with COLAs) to the cost of living –Social Security being one of them, or maybe government pensions or state pensions. If you used the CPI and the CPI is artificially inflated, think about wage-bargaining agreements between unions and management that are tied to CPI, or think about that for rental increases. I had an argument with one of my tenants who wanted to use the CPI. I said I'm not using the CPI, that's a bogus number and you know that. And so we had a tough little negotiation and that's the problem where these numbers are so artificial, it's really beginning to impact real wages. [33:38]

JOHN: So given this atmosphere, what is PIMCO's advice on it.

JIM: Well, Gross goes on -- what are the investment ramifications because if you have world inflation rates that are now at 7% and the US is only reporting, you know, inflation rates of 3 and 4%, this obviously is going to impact what happens in the world. And he says here: The role that PIMCO is more than willing and able to provide. In this role, we would suggest the following: 1) treasury bonds are obviously not to be favored because of their negative unreal interest rate; 2) US TIPS, those are our Treasury Inflation Protected Securities, while affording headline CPI protection risk the delusion of an artificially low inflation number as well; 3) on the other hand, commodity based assets as well as foreign equities whose PE ratios are better grounded to real CPI rates and bond yields are more -- should be excellent candidates. So he's saying foreign bonds and foreign stocks here because they are more realistic. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates that, while high, at least are credible. 5) developing, BRIC-like economies –that's Brazil, Russia, India and China – are obvious choices for investment dollars.

And this sort of lines up with his co-executive at PIMCO, a gentleman by the name of Mohamed El-Erian. I recommend highly you get his new book called When Markets Collide because El-Erian talks about: 1) there is a re-alignment in growth around the globe that is occurring today from the US economy and the US consumer, to more newer engines of economic growth that are coming from China, India and Brazil. 2) El-Erian makes the point, is the return of inflation. As these countries go from being just producers to being producers and consumers, there is going to be an upward pressure on commodity prices. This once again gets with our theme that commodity prices are heading higher. We're going from a world of disinflation to a world of inflationary pressure. And then he takes about this huge transfer of wealth from creditor nations to becoming debtor countries such as the United States. And so, John, here we have an example from – when the world's largest manager of bonds is telling you, and by the way, El-Erian, as we mentioned last week, is only recommending a 5% holding in US bonds and only 9 percent in international bonds. The bulk of their assets, PIMCO is going to be going to 15% US equities, probably large cap internationals, advancing economies 15% and emerging economies 12% and private equities, 7%. They are talking about 6% in international real estate, 11% in commodities, 5% inflation-protected bonds because these people are looking at this, this is the long term secular trend that is now unfolding and it's going to be with us for a longer period of time. And that's why I think, John, that as we take a look at this, is they can squawk and make as much noise, saying this is immoral, or not immoral, but the problem is they are all inflating. It's a worldwide phenomenon. You’ve got growing demand. You have supply that cannot keep up with demand and until supply is sufficient enough to keep up with demand and there is a glut in supply, the long term trend –and this is a trend – there are others like Jimmy Rogers that have talked about it – this trend goes well into the next decade. [37:40]

JOHN: Right. And government meddling isn't going solve the problem. It's only going to make it worse.

JIM: No. As they start saying that it's immoral to invest in these areas, meanwhile, while government takes a third of our corn crop and then pays 30 billion dollars to farmers not to grow it. Who is being immoral here? But if they try to restrict people from investing, this is step one. Step two will be wage and price controls; step three is going to be capital controls, and we're going to see all of these unfold in that crisis window that we keep talking about between 2009 and 2012. [38:18]

JOHN: So given that this is the environment, what are you doing to invest? And then obviously you want to protect your clients?

JIM: Well, we've been investing along five themes. One has been precious metals. And we've been there since 2001. Second has been energy. Third has been food. Fourth has been water and fifth has been infrastructure. And that's exactly where we are focusing. We're buying large cap international companies and we are buying foreign companies –almost a good 40, 50% of our portfolio is in foreign equities that are large international companies on the resource sector, energy sector or any of the areas whether it's water, food, etc. But this is something, John, that we believe is a long term theme that's going to be there for years to come. [39:08]

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

The Four Phases of Inflation

JOHN: History is full of classic quotes. And I would like to read one here from Jens O. Parsson’s book Dying of Money since

Everybody loves an early inflation. The effects at the beginning of inflation are all good. There is steepening money expansion, rising government spending, increased government budget deficits, booming stock markets and spectacular general prosperity all in the in the midst of what are temporarily stable prices. Everybody benefits and no one pays. That's the early part of the cycle. In the latter part of inflation on the other hand, the effects are all bad. The government may steadily increase the money in inflation in order to stave off the latter effects, but the latter effects patiently wait.

In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets and rising taxes and still larger government deficits and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everybody pays. Nobody benefits. That is

You know, the tragedy – Jim, that whole cycle there is so true. The problem is the people who experience the final stages of inflation are quite frequently not the people who got them into it, so the people who got into it were the ones who benefited and then the later generations, two or three down, are left holding the bag and all of the misery. And they don't quite understand why. And they keep telling their politicians to do something about it. [41:07]

JIM: And here we are, John. We're in an election campaign and you know this as well as I, and I think everybody listening, elections are won by candidates who can most convincingly say we are going to give you everything you want and you won't have to pay for it. In other words, the free lunch concept. I'm going to give you something that's not going to cost you anything because I'm going to take it from somebody else. And as we know, with all of these massive spending problems that they are talking about, and let's go back to Jens O. Parsson: What is happening in the latter stages? All of the effects are bad. The government money supply continues to go up, but now we have the ill effects. I mean John Williams has documented how M3 is now growing at close to 17%.

In the terminal stage of inflation, which is what we're heading into, there is faltering prosperity. How often do you hear that people are struggling to make ends meet, the paychecks aren't going up as fast as the cost of living, money is getting harder to get now, the banks are tightening credit; we've got falling stock markets; Obama is talking about probably the largest tax increase, you know, where we would – for somebody self-employed, they are going to see 60% tax rates; and rising taxes.

Another effect that he mentioned here, larger government deficits; the government deficit is going to be over 400 billion this year; roaring money expansion now at 16, and 17%; and accompanied by soaring prices and the ineffectiveness of traditional remedies. Everyone begins to pay.

That's exactly what we're seeing here because there are four phases to an inflation cycle.

In phase one, the money supply is growing, but the currency is not losing value because people still trust it. In these first stages, you don't see prices rise, for example, at the beginning of this decade because prices are not rising as fast as the money supply. The money supply goes to an alternative form. In the 90s, it was the stock market and in the beginning of this decade it was real estate. And that was the first stage – remember the prosperity stage, the early phases of the inflation is all of the wonderful things, rising stock prices, rising real estate prices.

Now we're entering into the terminal phase and that is very, very important because right now in that early phase one, where we had this rising money supply, it was the good impact of inflation; you know, nobody complains when the stock market is going up; nobody complains when the price of real estate is going up. Even though the dollar began to lose its value, real estate prices were going up and people said – John, you heard this, in fact, Bernanke gave a comment testifying on Capitol Hill that he goes, “you know, a falling dollar doesn't really effect us if you pay for your goods in dollars. You're not impacted by that.” Well, try to tell that to the person that walks into a grocery store or pulls into a gas station or goes into a doctor's office or pays their kid's college tuition. That's not what people are experiencing on the street.

And in the second phase, which is where we're entering in now and have been, that is when the currency is in trouble. The currency begins to lose its value. We're talking about a drop in the Dollar Index. We were at roughly 78 on the dollar index at the beginning of the year, we're around 73.80. We've had a little bit of a dollar rally here in the last couple of days as if the Fed was going to get tough and do something. But actually at it's low point this year just in April, the Dollar Index fell to 71, especially with all of the of the credit crisis that we were experiencing in this country in the month of March as Bear Stearns went under and the Fed was rescuing everything. But this is the process that we're in right now.

In the second phase, you know, people are starting to catch on, especially sophisticated investors. Money velocity is starting to go up. Prices are starting to rise faster than the money supply because each unit of the money is changing hands faster. People want to get rid of the money quickly, and that is especially happening overseas where foreign central banks and foreign investors are dumping dollars as quickly as they get them, and they are going into either alternative currency, they are buying gold and silver at the largest records in recorded history. We have never seen a bull market in bullion-buying that has been this long lasting and this continuous in the history of the gold and silver markets. And that's what's occurring as we speak.

And the other thing is prices are starting to rise. In other words, the inflation rates have moved from Wall Street onto Main Street, and that's where we are in the second phase of inflation. I'm going to repeat some numbers here, but once again, this is going to illustrate the point. We've got money supply growing at 16, 17%. We have oil prices that are up 40%. We have natural gas prices that are up 75%. We have got coal prices that are up 26%. We have got aluminum prices that are up 22%. Copper up 19%. We've got tin prices up 28%. Ethanol up 25%, corn prices up 55%. Soybean prices up 28%.

And what is happening now, as we get into the second phase as money velocity increases, as prices rise faster than the money supply, now you're getting all of this noise coming from government: “is it moral to invest in this,” “we need to stop this.” And I want to read a quote here because this is going to sound very familiar and this is from another great book. (There were two of my favorite books that were written in the 70s inflation. One was Jens O. Parsson’s book Dying of Money and another book written at the same time, is When Money Dies: The Nightmare of the Weimar Collapse by Adam Fergusson.) And this is taken from Ferguson's book When Money Dies.

It was natural that people in the grip of a raging inflation should look about for someone to blame. They picked upon other classes. John, the rich people. Other races, other political parties – doggone Republicans – other nations – OPEC. In blaming the greed of the tourists or peasants or wage demands of labor or the selfishness of industrialists and profiteers, or the speculators making fortunes in the money markets, they were a large measure still blaming, not the disease, but the symptoms. A few of the financially sophisticated could be heard blaming the government and the Finance Minister in particular. But a typical view was that prices went up because the foreign exchange value went down. Although the price of the currency matters –

And it just goes on here. And John, what are we hearing right now? [48:35]

JOHN: It's pretty much the same thing. It's its oil companies. It's the speculators, it's-the, it's-the – except everywhere where the finger needs to be pointed.

JIM: Yeah. They are talking about the symptoms rather than the cause. You cannot grow these budget deficits. You cannot monetize government deficits. You cannot grow your money supply at high levels and not experience the inflation rates that we were talking about earlier.

Bill Gross said world inflation rates are at 7% and the number that we report to the public, the United States is experiencing the lowest inflation rates in the world and [yet] our currency has dropped by almost 40% since reaching a peak in 2001. And he's saying, you can no longer fool the people; and that's what happens in the second phase, the financially sophisticated recognize what's going on. That's why you're seeing the Bill Gross or a Mohamed El-Erian at PIMCO saying we're in a new world now and the return of inflation, you've got to acknowledge that. And if you do, you shift your investment strategy.

And that's exactly what's occurring right now. People are looking for safe havens from the depreciation of the dollar and the inflation rates that they are experiencing, they are looking for real goods. And so that's where we're in right now. We're in the phase two of the inflation where the currency is in trouble, velocity is starting to increase and that is why it's very important to understand this. That's why you have heard Bernanke sort of shift gears and you've seen the Fed governors, they are all using the “open mouth” committee, and they are going out there and they are trying to talk inflationary expectations down because inflationary expectations now –that's what I call the “Keep-Them-Fooled Index” – is starting to rise. People are starting to catch on. They may not know what the cause is, but they do know that the numbers that the government is reporting to them on inflation is not what they are seeing in day-to-day living when they go to the grocery store or they have to pay for goods and services that you need to live with. And that's why the government is in trouble and that's why they are using the open mouth committee right now. [51:03]

JOHN: But like we've discussed before here, Jim, when they get into this phase of inflation, the options the government has –or in this case the Federal Reserve because it's different than the government – become narrower and narrower. It always reminds me of riding in one of those Western box canyons that just gets narrower and narrower and your options become less and less until finally you totally run out of room because here we have rising unemployment, we have financial firms in trouble and look at the foreclosure rates. Of course this is something we were talking about three years ago – remember, the housing bubble that we were going to see this. But you've got all of this, but they don't have a lot of wiggle room now at this stage of the game to fix this because if they raise the inflation rates to try to shackle the inflation under, then, you know, it threatens all of these other areas and people feel it almost immediately.

JIM: You know, it's funny. When the Fed was tightening interest rates beginning in 2004, the banking system was loosening interest rates through lower lending standards. Then you have the Fed loosening interest rates, as it began last summer and the banking system tightening lending standards. So even though the Fed is loosening the money supply, you now have the banking system which is tightening as a result of lending standards. So this whole vicious circle is now coming to its terminal phase, and that's what the government is fighting and they are not going to win this battle because, like I predict, first it's going to be restricting investments in this area – that's step number one, that will be government’s response. You know, it's the blame game that we just talked about from Fergusson's book, blaming it on the speculators. Phase two, when that doesn't work it’s going to be price controls; and then phase three is going to be capital controls. It will be, like, oh my goodness, you've got these greedy oil companies raising prices, businesses, you know, Dow Chemical is raising prices 20% because of these energy costs. So manufacturers have a choice now, you either start passing the price increase on to the customer or you go out of business because you can't afford to operate the business at a loss because if you lose money your cash flow dries up, you have to go to the bank to get financing, it just doesn't work.

So now we're entering that phase where corporations are passing on costs on to the consumer and as these prices begin to escalate, then you're going to hear talk about coming in with price controls very much like under Nixon and then very much under Jimmy Carter when he talked about – you remember, John, they wanted to keep price increases and wages to 7% at a time inflation was running at 14%. And back then, we had more realistic inflation rates that were more accurately reported than what is reported today. [54:08]

JOHN: But that didn't hold together very long before it really fell apart. It really just didn't work for any length of time whatsoever.

JIM: No. And what it took was a guy like Paul Volcker to come in, he tightened interest rates, raised them to 21%. If someone like Paul Volcker did that today with debt levels where they are today at roughly, what is it, 360% of GDP, you would collapse the economy because the debt levels both at the consumer level and even at the government level because remember, when interest rates rise, what do state governments do that have to finance themselves? I mean here in California, we're talking about just to pay this year's deficit, we're take being issuing bonds based on future revenue from lottery tickets. That's how desperate it's gotten here. [54:44]

JOHN: So if we posit the fact that we are in phase two right now out, of four phases –although you'd almost think we're down to the end game here – what really happens when we get into phase three and finally phase four. And I would assume that there is almost an exponential increase in how fast this happens. In other words, as we go through these phases, these are not equally delineated phases time wise. Is that a fair guess?

JIM: Yes. But when you start getting into the final phases, things really begin to accelerate which is what we're already seeing in commodity prices. And then you're soon going to be seeing this in consumer prices. That's why in the next phase, you'll see from government sometime next year, possibly as soon as next year, is wage and price controls because in phase three, velocity starts to increase faster than the supply of money because nobody trusts the currency. And you start going to the store and you see that every week, you know, and sometimes during the week, people at the grocery store are changing prices so rapidly and nobody trusts the currency. It's like I don't want to hold cash. I want too spend it immediately because if I hold it in my wallet, it's depreciating in value. That's what's happening to people in bank accounts right now because when you debase the currency and you depreciate it as rapidly as they are doing, what you do is you destroy thrift. And this is once given going back to Fergusson's book When Money Dies, he talks about as the old virtues of thrift, honesty and hard work lost their appeal, everybody was out to get rich quickly, especially as speculation in the currency or stock shares could palpably yield far greater rewards than labor. For the less astute, it was an incentive enough and arguably morally defensible to play the markets and take every advantage of the unworkable fiscal system merely to maintain one’s financial and social position.

And this is where we are today. When you see commercials on financial stations, they are not talking about investments – “trade, trade speculate, speculate, trade” – and that's where we are today. It's a means of keeping even because what do you do when your real cost of living is going up at let's say, the 10% a year. Well, because most people pay a third of their income in taxes, you need a 15% pay increase to break even just to pay your 10% cost of living and most people can't could that so they have to make it up in other ways. They either use their credit cards, they are taking equity out of their homes, they are cashing in 401(k) programs; there is a new program that allows people to borrow out of their 401(k) programs. And you start monetizing assets. And likewise, you start speculating in the market in the hopes of regaining or keeping even with inflation, and that's exactly where we are right now. We're going from phase two to phase three and that becomes a real dangerous phase because at that point, nobody even trusts the currency anymore. And you're already seeing that overseas is foreign entities, whether it's central banks, governments, forming sovereign funds to invest in real assets; or its managers of wealth like PIMCO that are saying we're switching our investment strategy given the nature that we see in front of us in an age of inflation. So that's the paradigm shift here. And one of the problems that we're seeing sideways in markets, in commodities, oil up one day, down the next. You know, oil was down earlier in the day, it ended up on the positive side. The CRB Index went from being negative to positive. And that's why there is this noise because there is a paradigm shift that's occurring in real time and the media is doing the best job to confuse everybody. [58:36]

JOHN: But you know, if you listen to everything going on on the talkies the last couple of weeks –even listening to Congress – and then go out and talk to the average person on the street, they don't understand all of this because the conversation that you hear really creates more of, as they say, more heat than light. And I think the average person walks away from all of this blah, blah, blah, much of which is really confusing rather than enlightening and they say, “I just don't get this,” and they finally turn and say, “somebody fix it.” That's the only thing that the public can do. They just know they’re hurting, they feel the pain. They hear all of this contradictory, conflicting; a lot of the stuff is deliberately posited misinformation and that just leaves us in a horrible quandary. But that's what happened in Germany.

JIM: In fact, Adam Ferguson takes about how inflation is the ally of extremism. And he reports about: The important considerations are that -- he's talking about what happened in Germany because their second inflation occurred with Hitler, which brought Hitler into power. He said:

The important considerations are that Hitler and the Nazi Party were able shamelessly to use the miseries inherent in severe inflationary situation to drum up nationwide opposition to authority and to persuade many thousands of people that the fault and blame lay directly in many places where it did not, with the men who had signed the Armistice, with the French, with the Jews, with the Bolsheviks. Inflation played into Hitler’s hands and was no more the invention of the communists who were also taking advantage of the social wreckage it was causing, than Hitler and the Nazis. Inflation is the ally of political extremism. The antithesis of order. At other times in post revolutionary Russia and Kadar’s Hungary, it may have been deliberately engendered in order to destroy the social order, for chaos is the very stuff of revolution. In Germany at this time, the inflationary policy was the consequence of financial ignorance, of industrial greed and

And then he goes on and he talks about what really broke Germany was the constant taking of the soft political option in respect of money. Basically, government had no discipline to discipline itself. And so it was we will raise taxes, you know, I get back to what are the latter stages of inflation. The terminal phase faltering prosperity, rising government deficits, tightness of money, falling stock markets, rising taxes and even larger deficits and roaring money expansion which is now accompanied by soaring prices and the ineffectiveness of traditional remedies.

And that's what they are worried about now about these inflationary expectations, John. They are starting to grow. They are starting to rise, which is why the Fed open mouth committee is out in full force. And there is so much noise and confusion, it's being done deliberately so as to divert attention from the root cause of inflation which is government itself. And that's why there is a huge cry as you mentioned earlier, people know that prices that they are facing – you hear talk in the political debate “wages are stagnant, they are not keeping up. Why?” But you never hear anything about the government cutting back on expanding the money supply and credit; you don't hear government talking about reducing the deficit.

There is so much waste – in fact, it's gotten so blatant, Fox news did a special that was aired on Sunday and it was called Earmarks. They talked about these earmarks, these special rewards that congressmen use to reward those that contribute to their campaign. But now, John, it has gotten so blatant, the congressmen are saying why should we just reward those who contribute to our campaign. Why don't we set up companies and corporations that can be the benefit of these earmarks, and so they listed a Republican who bought large tracts of land around a new highway bill and he knew where the highway was going through, and him and his buddies through a different named trust bought all of this land and this congressman went from being worth 200,000 to 16 million. Then they talked about individuals on the other side of the fence – another party – where they set up this company to benefit from these spending programs. And when the person refused to take the income from it and give it back to the congressman, he was incensed and he goes, “how am I to take care of my family?” So that's how corrupt it is.

This reminds me, if you study Roman history of the Senate before we went to a dictatorship in Rome when the senators were all out for themselves in terms of greed; and that's exactly what you have going on in Congress today where they are passing bills not only to benefit contributors to their campaign but also to benefit themselves. They are setting up construction companies that will handle government projects. I mean the conflicts of interest all over. They are always – have you ever noticed in these hearings they are always haranguing, “business is terrible, they are doing this…” and they are engaged in so many of these practices, the worse offender is government itself. It's absolutely amazing to see this thing unfold. But once again, this is what you see in the latter stages of an inflation.

So we've gone from phase one where money supply is growing but the currency is not losing value because people trust it. We are now in phase two where the currency is in trouble, it is falling, money velocity is increasing and expectations for inflation are going up, and we are heading into phase three where velocity really starts to ramp up, prices are rising much faster than the supply, the currency is being ditched, which is what is occurring right now overseas by those that are accumulating dollars. And eventually you get to phase four where the currency collapsed and that's the final phase, which is the hyperinflationary phase. [1:04:51]

JOHN: But you pointed out something very important, change agents, social change agents actually like this type of confusion, because they can then get legislative bodies to pass all sorts of law that people with saner heads in sounder times wouldn't even think about doing. That's why it's also very dangerous politically when you get to this stage.

JIM: Very dangerous because as Fergusson was mentioning in his book, it becomes the agent for extremists. The Nazi’s rose in power. And you look at Chavez and what he's doing, Venezuela's inflation rate was now 32%. They had shortages of food whether it's milk, cereal and things disappearing off the shelf because he's trying to control prices, and at the same time punishing the producers and saying “you will produce and you will produce at a loss or at this price.” [1:05:42]

JOHN: Which cannot go on forever.

What is really illuminating in is this area is if you go back –and there are books that have been published, you can find this in your library – pull up the campaign posters from the 1932 election in Germany and look at campaign ads that the Nazi party was running. It wasn't “Sieg Heil, let's go get the Jews.” It was: “Women, think of your children, vote Hitler.” Those were the slogans that are were coming out. “We're going to be the salvation of Deutschland.” Blah blah blah. It was none of what you saw coming in later on down the pike. It just wasn't there in most of these. Maybe in some of the things they had some anti-semitic issue, but that was a bigger broader issue going on in Germany at the time.

I like showing this to groups of people when I speak because their eyes: Wow, this just doesn't seem to be the image that we had of the Nazis. And remember, they were received as the saviors of Germany, not as the bad guys they ultimately came to be.

JIM: It's -- well, getting back to Santayana.

JOHN: The famous line attributed to George Santayana: Those who forget history are condemned to repeat it. But one of the things we have learned from history, Jim, is that people don't learn anything from history, so that's a lesson learned from it, which means you can always tell which way the herd is going to run in a given situation; and you need to make your plans accordingly which I think affects investment and everything else.

JIM: And I highly recommend go to the PIMCO website and read Bill Gross's piece for June and better yet, if you have the chance, go to the book store and pick up co-chief executive at PIMCO, Mohamed El-Erian and his new book When Markets Collide. It will give you a lot of insight because here you have the largest bond fund manager, you know, bonds lose value in a period of inflation and when the world's largest bond fund management group says we're changing our investment philosophy, we have the means and the will to do this. That should be a clear cut signal for investors because, John, if they don't, they are going to be wiped out. [1:07:42]

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

Part2

Crime of the Century, Part IV: Fingerprints at the Crime Scene, Protecting Mining Companies & Internet Rats

JOHN: Well, we've been causing quite a row out on the internet, it seems like, Jim, with our series Crime of the Century, and today we're doing Crime of the Century, Part IV. We've been talking specifically about naked short selling, but other issues that are related into it. Today we're going to talk about fingerprints and the crime at the scene. We hear about forensic analysis, or forensic accounting trying to find out what had gone wrong. This is somewhat the same thing. How do you tell who is doing what and where? And then we're going to talk about how mining companies can protect themselves from this type of assault because it really affects them and their investors. And then we're going to look at how the media is being used to bilk investors out of their money. Now, surely they wouldn't do that, Jim?

JIM: You know, one of the amazing things about this is we're talking with several law firms right now on this very issue and working with them. And the senior partner told me, he said, one of the reasons that they are fighting in keeping this out of the court room is, John, you know, it's like, what do you do when they – there is a crime scene. You get the forensic pathologists, they come in and they dust for finger prints. Well, in the securities market, every crime scene has fingerprints. And the unfortunate thing for the criminals is every trade transaction is a written record. You cannot get rid of it. When a bad apple investment bank comes in two seconds before the market closes and drives the stock price down by 8%, that is a written record. Or if a company shows up on the Reg SHO list on a naked short selling, that is a written record. And if you're an investment bank and you're executing a trade for an individual, that's a record that could be subpoenaed in court.

In fact, there was a court case in Canada involving an investment scheme offshore where you had seven BC brokers that were named and were aiding and abetting in this issue in the Netherland Antilles where a lot of this stuff occurs offshore, where it's hidden from regulators. All of this can be subpoenaed in a court of law. And that's why, like, for example, like last week where Wes Christian talked about, remember the old RICO, the racketeering charges. When you're involved in this, this is the equivalent to racketeering. And this is why the bankers have been trying to fight to keep this out of the court rooms because once it gets in the court rooms, John, the fingerprints are all over the crime scene. You can't hide this. You can't destroy the trading records for a day. You've got to keep the trading records. So the unfortunate thing for the criminals is there's a written record of this; and there is a clear path here that the regulators can follow to identify how the crime has been committed because there are fingerprints. There is every bit of evidence all over the place and that's why they are fighting like the dickens to keep this out of the court room because once they get in the court room, they are nailed. [3:15]

JOHN: Plus a lot comes out in discovery that really was unknown before, just things that you wouldn't even think of and that may lead to other trails and other areas, so as long as you can keep it out of discovery, then you're better off. That is their philosophy in this.

JIM: Yeah. And especially as we mentioned in the Part Two of Crime of the Century, all of these trading techniques, you might be able to argue, it was two seconds to the market close and we just had this one trade that went off. Okay. That might be dismissible, but when you see it on a daily basis, when you see it done with hundreds of companies, that's a hard one to explain. You can't say, well, it's just coincidental by the end of the day even though the stock is up in the last two seconds of trading, one company this week was trading in a range and I kid you not, the last second in trading, they took the stock down six or seven percent and the company executive called down to the market maker and said, “What happened here? The stocks trading at one level all day and the last second of trading, there is this trade that goes off and the stock is taken down.”

I got a call from an executive one day where we were talking and his stock which had been up 5% that day in the final two seconds of trading, one of these bad apple Canadian investment banks took his stock down 8% -- in the last final two seconds of trading! And we've got these print out screens around and that's why we are keeping track of this kind of activity that's being done on 10 stocks. We have trade screens that identify the bankers, identify the seconds of the trade.

And John, once again, this is the great thing that the regulators have and the prosecutors have is there are finger prints on the crime scene that can't be erased, so it's not like you can throw away the weapon and dispose of it. It's there for everybody to see and every securities firm has to keep records for years in case they ever get audited and that's why the biggest fight right now is to keep it out of the court rooms. And it was very much similar to, you remember the fight over tobacco and it was to keep it out of the court rooms, and finally it was the state's attorney generals that brought it to a class action lawsuit with the state attorney's general that actually brought down the tobacco companies. They could no longer hide this. And that's what's coming next to the security industry, firms like John O’Quinn’s and Wes Christian’s and his law firm that are pioneering this with software that can go in.

And you heard him talk last week where there was a case where they went in and customers were showing that they own 12 million shares of a company and firm they were dealing with only had one million shares at the DTC, so there was 11 million share that's customers held in their accounts that didn't exist. And that's why we're calling this the Crime of the Century. This is probably the biggest financial crime ever committed in this nation's history. That's how big and pervasive this is. [6:17]

JOHN: But there is going to have to be a trigger to make the securities people go after them or Congress people or members of parliament in Canada to change the law.

JIM: Well, it's starting. As we played the clip last week with Chris Cox who is the current chairman of the SEC, he talked about they are taking actions with only 400 complaints. Imagine if those 400 complaints in the US or Canada turned to 4,000 or to 40,000. A lot of individuals have written this and I have never seen the kind of response that we're getting from mining companies and individuals about this very same issue, and people are saying, “well, the little guy doesn't have a chance.” No. They do have a chance. John, it's kind of like, let's say, that you had a local gas station and people that ran this gas station were cheating people, they were doing lousy work, they were over charging people. You know, if somebody who went through that experience and told somebody else, “hey, don't go to this gas station because never going to rip you off, this is what they do,” word starts to spread and if it spreads from one person to another person – and we're going to interview later on in this segment one of the editors of Stockhouse where naked short selling is really taking on a life of its own where it's the fastest growing blogs on the site in terms of what's going on. [7:43]

JOHN: Basically, you're saying we have finger prints all over everything because we have a very extensive set of financial records that have to be kept on all of these trades. You're Deep Throat. And you're meeting somebody in a garage in Washington and say, “hey, buddy. Here is where it goes. Look over here.” Where would that be? What path would you lead these regulators down?

JIM: Well, actually, there is a six step process that the regulators could take to nail these guys. Step one, a lot of this activity occurs with the financing in the mining sector, so step one would be to take all of the private placements that were done in a year by particular investment bank or a series of investment banks because there is, believe me, there is more than one. There are quite a few. Take all of the private placements that they did, so that's a key, and say “all right, you guys are in the investment banking business, let's take a look at your records.” Then step two, take a look at trading activity in the, let's say, investment bank A is doing a financing for a mining company we'll call ABC.

So you would get all of the private placements done by the investment bank. Step two is take the trading in this mining company six months prior to the financing and six months after the financing because that's real key because usually – one mining executive sent me a graph and he was telling me about where basically they had taken this individual's company stock and drove down the price almost 75 and 80% prior to the financing and literally crushed the stock and left the company in a very vulnerable position. But anyway, step two is once you have gotten all of their private placements and their financing, then take every one of those companies that they financed and take the trading six months prior to the financing, six months after the financing. [9:57]

JOHN: But wait a minute. What about short positions in this?

JIM: My friend, you've got to step number three. See, you're a good detective.

JOHN: I'm very good at that. Yes.

JIM: Step number three is take the short positions and start monitoring the short positions six months prior to the financing and six months after the financing – so that's step three. So now you're taking a look, and what you're doing is following the trading activities prior to the financing and after, following the shorting position prior to the financing and after. And step four is also look at the firm's own trading for its own account, six months prior and six months after the financing.

Step five, take a look at the individuals that they brought in to the financing. In other words, the institutions that participate and take a look at the relationship with the investment bank and these institutions – most of them are usually hedge funds – because now what you're saying, okay, there is a collusion here, there is a crime that's taking place. Who is all part of the crime syndicate?

And step six, also take a look at chat room activity because a lot of times when they are taking down a stock, you will find what we call the internet rats that show up on the chat rooms and they start putting out false information about a company; they start maligning the reputation of the mining company executives, the board of directors. They misconstrue drill results and stuff that all of a sudden they show up. Many times, these will be brokers at the investment bank or they may be internet rats hired by the hedge fund. So there is a trail here and they can go back into these chat rooms, they can take a look, find out these people's identity. Do these people work for the investment banks? Do they work for the hedge funds?

So here is a six step process, John, from the crime scene where you can take the financing, you can take a look at trading before the financing and afterwards, the short positions before and after the financing, the trading of the firm, the relationship of these firms to the institutional clients that they bring in on the financing. And then, once again, chat room activity around the internet because they use the media –and we're going to get into some film clips next week with part five of Crime of the Century where a well known hedge fund manager talked about how he used the media as kind of a pawn in his ability to influence the price of the stock. [12:42]

JOHN: Okay. All of that side is what investigators could do, say, we were to begin prosecuting the Crime of the Century. But obviously this is ongoing until that happens, and you have mine companies or other companies that are involved in naked shorts. What can they do to protect themselves? First of all, how can they detect this because just based on the phone call that you were talking about earlier, a lot of CEOs of companies don't really quite understand this is what's going on out there?

JIM: The first thing, if you're a CEO of a mining company or you have an IR guy, you'd better have a Level 2 so you can see what's going on in your stock, you can see who is doing the trades. I was talking to a mining executive on Wednesday where he was very cognizant of the fact that his stock had been up during the day and the last two seconds this one particular Canadian investment bank took his stock down 8% in the final two seconds of the trading. So he's aware. So mining companies have to get a Level 2. They have to take a look at who is trading their stock. So that's one way that they become aware of it because if you don't have that and your stock is going down in the final two seconds of trading or they carpet bomb your stock – one company called me and their stock was subject to a carpet bombing on Wednesday where they took it down almost 15, 20%. No news. Here is a company whose revenues have tripled, whose profits have quadrupled and who are going to quadruple again and has probably the highest profit margins of any silver producer and they carpet bombed it. And we got a couple of emails from people who own the stock and it's like what's going on. And a couple of people are starting to wise up and they go, “are they carpet bombing? “ I go, “yeah.” Just coincidentally there is a short position in this company. So, Level 2.

Now, the other thing that a mining company can do is once you've got Level 2, so you're watching what's going to happen to your stock, you see what investment banks, who are the buyers, who are the sellers. Before you engage the investment bank, you have a form that the investment bank signs off to that that they will not engage in any short selling activity or jitney trades to other investment banks. [15:10]

JOHN: Wait a minute. It sounds like a sailing term. What is a jitney trade? You know, “tars, bring in the jitney.”

JIM: A jitney trade – a lot of times when you want to cover your tracks and let's say you're under close scrutiny, let's say that you're going to carpet bomb their stock and you're going to bring in the short sellers – hedge funds – that are going to start shorting. You don't want to be the guilty party, so you’ll tell the hedge fund, “Look, why don't you sell your shares short with another one of our partners here, another investment bank, so if somebody is watching us, the selling will start occurring at another investment bank rather than the investment bank that's doing the financing. And then you'll short sell the stock with another investment bank, but we'll bring you in and we'll cover your short position on the financing.”

So what you do is you have your lawyers draw up an agreement that the investment bank agrees, number one, they will not engage in any short selling activity, they will not engage in any collusion with other investment banks that short sell; and then also, there is an agreement that any short seller or any party to the transaction – in other words, any investors coming in on the financing must disclose their short positions and their holdings in the company. [16:33]

JOHN: It would seem, though, Jim, that you're getting tangled here in a lot of securities laws and other related issues, so how is this going to interact with say, for example, just taking one of these investment banks to court or something along those lines.

JIM: Well, the problem is, as we mentioned earlier, the investment banks are trying to keep this out of the courtroom because on the crime scene, the finger prints are all over it. Every single trade that occurs on a daily basis between the buying broker, selling broker, the time of the trade, we've got reams and reams of this at our attorney’s office right now that documents this kind of stuff. So a lot of these junior mining companies, John, they just don't have the money. They are paying for drills, they are paying for supplies, they are paying personnel. They can't take on the bankers in the courtroom because the bankers are filthy rich. So what you can do, though, is before you talk to these companies is you can have them sign a legal agreement that they agree not to engage in these fraudulent activities.

For example, let's say you're talking to investment banker A, you're talking about a financing and all of a sudden you see investment bank B now becomes a huge short seller and seller of your stock, and investment bank A agrees not to do any jitney trades or anything like that, what they have done if they are in collusion with this firm is they have committed perjury. And as my lawyers have told me, you can get these guys on perjury. I mean that's a serious offense. When you say, “hey, I agree not to short sell your stock, I agree not to consult in collusion in order to short sell your stock through another firm I'm in collusion with, and three, I'm not going to bring any short sellers into the offering.” So it puts the investment bank on notice that you were watching this activity and if you see this activity – all of a sudden heavy selling starts coming into your stock by another investment bank, your short position starts to go up, then it's a call to the attorneys. And so this is something, I think, that mining companies can take a step and make it part of all underwriting or talks.

And you want to do this before you even come close to signing anything. A lot of times mining companies, John, if they are talking to bigger mining companies, let's say I'm a small junior mining company or late stage development, and one of the big boys wants to come around and sniff around my property. You sometimes will have to sign an agreement that the mining company doesn't agree to buy more than 5% of your stock, will negotiate directly with management, so the mining company is protecting itself. These are the kind of steps that mining companies need to take to protect themselves from the kind of activity that we're talking about here, so that they don't have these investment banks. That’s because nobody wants to sign a piece of paper legally that they would perjure themselves because then you've got the goods on them. Not only do you have the finger prints from the crime scene, but you also have that they perjured themselves and then they are in big trouble. [19:42]

JOHN: Let us look at the subject of what we call ‘internet rats.’ How do they factor into this? We've talked somewhat about this in the past where people deliberately wind up in the chatrooms or on the blogs and they are there as change agents so to speak to influence the value of stocks.

JIM: Yeah. What you'll generally see, and you'll see a pattern you hear, when a stock starts to crater through either one of the seven manipulation techniques I talked about: they carpet bomb your stock two seconds before the close, they take the stock market down, or they put whopper bids on the tape, or they do the hand off where they do sort of programmed trading and shorting between two exchanges. All of these things are occurring and the stock starts to take a nose dive. All of a sudden you'll see new characters appear on the chat room out of the blue. And what they'll do is the investors who may not be aware of the Level 2, they are all of a sudden looking for information. It's like what the heck just happened. Why did the stock go down when gold was up?

Is there something wrong, is there news? That's where the internet rats show up. The internet rats are usually either employed by an investment bank or a hedge fund and their job is to go on the chat room and to put out false information. They will try to misconstrue information from public releases by the company, drill results, something going on with the company. They'll start impugning the character of management or they will take something out and twist it and so it creates doubt in the investor mind. And remember, these internet rats are paid by the more people that they can get to respond to the false information that they put out.

Let's get straight to the point. Why are they doing this? They are trying to scare you out of your position so that they can steal your shares because remember, when you're shorting a stock, you've got to go back and buy it. Well, they get into trouble if people don't want to sell the stock and they are holding on the their stock, how are they going to cover their short position. So what they've got to do is take green investors and they've got to scare these investors out of their life savings so they can steal their life savings to cover their short positions. And the way they do that is it by putting out in series of false information. And if you think about it logically, if I don't own a stock, why am I spending all day putting posts on a chat room that are negative and I have no interest, invested interest in this stock? When you see somebody doing that, that's your first suspicion, ha, here is a short seller. And that's what his purpose is. He's not there to help you. He's there to steal from you. He wants to steal your shares from you at a lower price so he can profit from your misfortune by causing you to panic, sell your shares so they can come in and steal your shares. In fact, I think it was in our second broadcast where we talked about the seven manipulation techniques and we read the confessions of a basher. They have various names. I call them internet rats, people call them bashers.

And remember, when you are a short seller, a very effective tool of the short seller is the media. We're going play some film clips next week, where a well known hedge fund manager is talking about how he manipulated reporters on the stock exchange floor or reporters in the press to put out a negative story on a stock that he was short, or to put out a positive story on a stock that he was long. And so the media is mainly a pawn in this and they use the media as a pawn to either manipulate people and change their sentiment to effect outcome that they want. In this case, they are shorting the stock. They want people to lose faith in the company and sell their shares, which then brings in volume, changes sentiment and allows them to come in and steal your shares from you and your life savings so they can profit at your misfortune? [24:09]

JOHN: So when you see all of this suspicious activities appear, all right, what are your options? What can you do?

JIM: Number one, ignore them because if you respond to them, they are making then more money. They get paid by the more responses that they get to their post. The second thing is it is a felony offense. You can go to prison for posting misleading information on a website with the idea of trying to manipulate investor sentiments so you may either cover in the case of pumping a stock to help your long position or causing people to sell a stock to profit from your short position. So the next thing is turn this person in to the authorities – the SEC, the Canadian authorities. And every time you see them – and a lot of times they'll change their venue when people discover their scam, they'll change their name and they'll change their moniker and come back; or they'll go to another website and start bashing the company. But usually, there is a short position in the stock and the seven manipulation techniques that I talked about in the second program are all occurring, and you've got to turn these people in.

If they get enough complaints at the SEC – there was a very famous case with the internet stocks in the late 90s of some people that were using the chat rooms to pump these stocks. They got caught. They are now serving time. They are in prison. And that's what you have to do. You have to put these people in prison and have that happen enough times and enough publicity and then these people will go to jail. What you don't want to do is number one, sell your stock.

And that's why we always talk about go to the company website, get the information directly from the company, read the press releases, call up management, do your due diligence so you understand what it is you own so you can spot these internet rats when they show up and start putting out false information; or if they raise some doubt, you know, call up the management of the company and say, “hey, there is this internet rat on your chat room and he's saying this” and this and this. Get the scoop straight from the horse's mouth. And then the third thing you do, just file a complaint with regulators about these people that are manipulating the chat rooms for that very purpose because eventually, if the regulators hear enough about a particular character, they can look into it and find out who that person is. And if they catch them and then the regulators find out that either one they are working for an investment bank, or two, they have been hired by a hedge fund to put out this information and that hedge fund is shorting the stock or the investment bank is shorting the stock, John, they are going to prison.

And also as we conclude Part 4 of the Crime of the Century, I just want to point out, Jim Sinclair at his website why JSmineset has now offered a $50,000 reward for information leading to the identification of the manager or managers of the hedge fund pool operators illegally shorting junior gold shares. The purpose is to level the field –and he's extended this and I believe him to be good for the money – and you know, something, we may even join him in this process. So if you are a former trader, broker, working at a hedge fund or an investment bank that you know of that was engaged in this activity, Sinclair is now offering a $50,000 reward. And if you are a former trader or have information or you know for a fact you can email me as well and we'll make sure that this information is disseminated to the appropriate people. [27:52]

JOHN: You're saying trader, not traitor; right?

JIM: Yeah. Trader. Maybe you were executing these trades at a hedge fund or an investment bank or are involved in this, or you worked for either one of these entities and you were one of the chat room rats that was going out and disseminating and putting out false information on companies that were being shorted because there is a hedge fund pool. They are a group of hedge funds that are involved in this activity and they are getting cooperation from the investment banks. And as Wes Christian talked about last week, this is collusion in many ways, John, because it would be the same thing – you have a fiduciary obligation, just like if somebody called me up and said, “Jim, I want you to sell 100 shares of Exxon and I'll deliver the certificates, well, we wouldn't execute that trade until you we know that we had the shares in our account.” So if you're a brokerage firm and somebody is shorting a stock and they don't have proof that they have the stock, you're under the obligation to secure proof that they do have those shares to back up their short position. So once again, culpability and the gatekeepers in this are the investment banks. [29:07]

JOHN: So basically what you're saying is that traders execute and traders are executed. How is that?

JIM: That's what it may be coming to.

JOHN: We'll follow that. Coming up next week we'll have Part 5 of the Crime of the Century, and Jim, what will we focus on at that time?

JIM: We’re going to sum up: we'll sum up what regulators can do, what companies can do, what investors can do; and then I’m going to invite Eric King on the show. Eric is probably one of the best chart readers and he's going to talk about some of these manipulation schemes. Eric is a private investor by profession. He reads the charts, he talks about this and we'll illustrate some examples. We're not going to disclose the companies, but he'll describe how he spots it occurring in real time, so investors can get some tips from Eric how they can, if they've got Level 2 or they are looking at the charts, see these crimes that are being committed as these criminals try to defraud investors out of their life savings. So that's going to be coming up next week.

And then after that, we're going to be writing a series of articles that we're going to publish on the web. I'm going to come out of my retirement writing to take this on. In fact, my wife who retired last December was so incensed as I was going through this material and just sharing it with her, we are actually going to come up with a new web page that's going to list companies that are on the naked short list. We're going to have link to stories, press releases, we're going to have sites they can go to, speeches so that investors can be educated and become aware of this. And what we're hoping is eventually that this is picked up by the national media; and once the national media picks up on this that it's eventually picked up by the regulators and the politicians until steps are taken to prevent this crime from occurring on a repeated basis. It was so blatant this week, John. I got calls literally from five and six mining companies where this was occurring in real time. They were made aware of the two second drop down, the carpet bomb, the monster bid – all of these things that we’ve been talking about, the word is spreading and people are becoming more educated. [31:20]

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

Other Voices: Darin Diehl, Publisher, Executive Editor, Stockgroup.com

JIM: Well, it’s no secret if you’ve been listening to the Financial Sense Newshour you know what naked short selling is. But, the topic is starting to catch on. And one area where it is catching on is a website on the web called Stockhouse. And joining us today is Darin Diehl. He’s publisher and executive editor of Stockhouse.

Darin, why don’t you tell us a little bit of what’s going on at Stockhouse with naked short selling. Where is this going?

DARIN DIEHL: Well, Jim, Stockhouse is a social network for investors. They come onto the site to talk to each other about investing, about specific investments; basically to share the due diligence that is required of those investors that like to do some of the investment decision making themselves. So the topic of naked short selling has been around the site for as long as that issue has been around investing. What’s happened recently though is that a couple of Stockhouse members have kind of stepped up to the plate and they’ve formed a discussion group specifically on the topic; and they called their discussion group – rather provocatively – the “junior mining investors robbed by Canadian investment banks” group. [33:11]

JIM: That’ll get somebody’s attention.

DARIN: That’s the title of the group which says something. And this group formed just a few weeks ago, just May 26^th was the day that the individual that kind of got it started put up on Stockhouse as a group and started inviting anyone who wanted to join. And now here we are just a couple of weeks later and they’re up over 250 members. [33:35]

JIM: Is that good growth or is that good participation?

DARIN: It’s surprising for a specific topic that’s not related to a specific investment. We have thousands of boards on stocks that certainly have larger communities following them, but for people then – I think it is in this initial period. And then when you look at what’s actually happening there are a lot of people coming onto this group who haven’t joined it yet but are reading the content created by the group. So the 250 isn’t necessarily an indication of how many people are interested in the topic, but these are people who have stepped up to join the group and then to create content comments in the group while others are coming just to read the content that’s created. [34:15]

JIM: You know one of the steps that I have recommended to investors – and this is aside from the topic of naked short selling – is that if you’re going to be investing in Canada in the junior mining sector you need to get a Level 2 so that if you’re going to go invest in a mining stock you can take a look at a Level 2: where are the bids; how big are they; where are the offers coming from and more importantly who is the buying broker and who is the selling broker on a trade? So if you’re going to go in and buy – and you know sometimes how liquidity can be very thin on some of these mining stocks you need to know and you just don’t want to call your broker and put in a market bid. With a Level 2 you can take a look at where is the size of the bids, at what price are they occurring, where are the offers, where are they occurring, who’s selling, who’s buying in terms of the broker – and especially when it comes to price manipulation; and two seconds before the market closes you’ll see who the criminals are. Does your company provide this kind of service?

DARIN: Yeah, Stockhouse members can certainly get Level 2 quotes. They can sign up for a tool called Stockstream which is a realtime watch list portfolio tool and they can buy Level 2 quotes to do exactly what you’re suggesting. And I think the broader point that you make there is what is the level of understanding that individual investors have about that issue and how to be aware of it and what to do about it in terms of their investment strategy.

And I think that there is a wide range of sophistication and understanding on that issue on Stockhouse and generally speaking among retail investors. So one of the things that this group is trying to do is to point people in directions where they can learn more about this issue. In fact, they have pointed people towards your broadcasts for some of this education because I think it is – depending on if you’ve been following – and there is a very high level of sophistication among some Stockhouse members in understanding these kinds of issues – but then it ranges to the other folks that are sort of hearing about it and seeing it as kind of a minefield issue that they may not have been aware of. When you think of investors that way, boy, it can be a fairly intimidating prospect for them. So it had me thinking going into this discussion with you that I might ask you back a question: What would be your advice to this group in terms of –you know, initially they’re venting with each other about the issue, they’re educating each other on naked short selling, they’re maybe anecdotally describing examples of where they think it’s happened – how do you think they should proceed? I’d be interested in your recommendation for the group on that. [36:57]

JIM: Well, a couple of things. If you’re investing in individual mining stocks and where you have a significant position in companies, I would recommend that they get a Level 2 because 1) it’s going to make them a better investor in terms of where to place their bids if they’re buying a stock – so that’s number one; 2) urge their mining company that if the individuals running a mining company aren’t aware of these kind of criminal activities that are occurring in the stock, you need to bring pressure on the mining companies to make them aware so that these mining companies – (we’re outlining a plan on this week’s program how mining companies can protect themselves legally from this kind of activity. So it’s not just making the investors aware but they better make sure when they’re doing due diligence on the companies that they invest in, that the companies that they’re investing in are aware of this very same activity) – so if a mining company has to go in another round of financing they don’t see their stock carpet bombed and diluted with short positions, naked short positions and then the individual investor ends up losing in this case – so that’s the second step.

3) The third step is they can take steps with their own brokerage account. If you have a margin account with your brokerage firm and you’re owning your junior mining stocks in a brokerage you are giving that brokerage the ability to use your own stocks against you and loan them out to a shortseller.

So 1) they can take delivery of their stock certificates; 2) they can request from their broker-dealer – and I’m not too big on this because the attorneys that we talk to is that they’re finding out even in cash accounts now that they’re loaning out these securities – so move their accounts to either a cash position – in other words, don’t hold them in a margin account or request that the brokerage firm not loan out the securities; and get a written form – have your broker acknowledge that. And then I think another step that they can do here – it was amazing, we played a clip last week from Chris Cox who’s the current chairman of the SEC and they are taking steps to curb naked short selling – increase the penalties; and they did that because they said last year they got 400 complaints. So a lot of your individual customers who are going to Stockhouse are thinking, “Well, you know, I’m just a little guy. What difference can I make?” Believe me! If the regulators start hearing from people, and people start filing complaints and instead of 400 complaints, it’s 4,000 or 40,000 – I’ll give you an example, Darin, let’s say that you’re taking your car to a garage, and you’re taking it to a garage and you find out the mechanic ripped you off, they did faulty work, you know, what would be the first thing that you would do? You would tell your neighbor, “hey, don’t take your car down to XYZ garage because they rip you off.” Well, imagine what happens with the power of the internet when one person tells another person, that person tells another person – and all of a sudden, like you say, you have 250 members on your community, but even a larger participation from the people that come to Stockhouse – imagine if these people all start writing complaints to the regulators and especially if they get Level 2 and they see who the crooks are.

DARIN: Yeah, and I think some of the people that have formed this group and are on there talking are actually discussing it in those terms: How do we organize in a way that we’re not a few individuals writing to regulator and disappearing into the ether that way. One chap has even mentioned that they maybe they should form some kind of a retail investor association around this issue. So I think what you’re discussing there in terms of your recommendations is very germane to their discussions because they’re trying to – you know, other than once they get past the venting and the anecdotal examples to each other of how it’s hurt them and they want to move towards action – I think that’s kind of what they’re discussing right now is how do we get organized and move towards action.

Educating each other and pointing out where they can educate themselves to each other is kind of the first step they can take I think. But like you say, at some point you’ve got to knock on some regulators doors and say, “what are you guys doing about this?” And if you do it in large enough numbers and if you also maybe involve mainstream media I think is another thing they could try to do. But it’s early going in the discussions, but I think it would be interesting to see if they can actually get organized themselves to the point of getting something done. [41:35]

JIM: And you mentioned the first step is to educate yourself –get a Level 2, understand how it occurs where you can monitor it on a daily basis and you can see these seven forms of manipulation. Second is they can talk to the mining companies that they invest in and bring pressure on the mining executives because if everybody starts getting educated – the investors and the mining companies – the process can stop. And then thirdly, if they keep the pressure on with regulators – you know what politicians are like, if they only hear from a few voters, well, you know, nobody is interested; but all of a sudden, if they start hearing from thousands and thousands of voters then it starts to get the politicians attention. And you know what gets their attention even more so, Darin, is when the mining companies themselves start rising up and becoming aware of the process because they’re forced to by the investors and shareholders of their company and taking the bankers to task on this (“hey, we see that you’re shorting our stock” or “we’ve seen that you are now the largest seller of our stock and you’ve taken our price down.”) And in this week’s show we’re going to tell legally how mining companies can start protecting themselves from this practice. But that’s how it has to start and it has to be continuous and people can’t give up and say, “well, I’m just a lonely voter. I’m just a lonely, small investor, what difference do I make?” Well, maybe one voter – one investor by himself doesn’t make a difference, but when they start gathering together spreading the news, filing complaints, talking to their mining companies, filing complaints with the legislatures, spreading the news to other investors – now you’re talking about a revolution and a movement and that’s what it’s going to take.

DARIN: At Stockhouse, it’s basically trying to facilitate that for them by just being the platform. You know, I don’t think it would be appropriate for us to lead the charge but we can provide them a platform and point towards ways that they can educate themselves and how they can communicate their anger about this issue to regulators and the media. So, yeah, I think that’s the role that we can and I think we’ll continue to let people know about some of the educational material that you and your folks are creating as well because I think that’s – if you look through the group, your broadcast and other background material has been mentioned a few times. [43:51]

JIM: Well, we’re doing Part 4, Darin, this weekend and then we’re going to conclude with Part 5 next weekend and then after that we are actually going to put together a new webpage on our website that’s going to have educational materials, diagrams, explain it how it works, speeches given by SEC Chairman, by attorneys, articles in the paper that have talked about it; and we’re even thinking of listing those mining companies that are on the naked short list and how long they’ve been on because that’s public information.

DARIN: Yes. [44:28]

JIM: And we’re taking another couple of steps that we’re taking right now; we’re working with three law firms and I don’t want to give away what’s coming – and then we’re trying to get contacts with people in the political realm and then also in the media. And then after we do Part 5, I’m going to begin writing on this subject and detailing this because I have never seen something this blatant. In fact, this week alone I’ve gotten phone calls from over five or six mining companies that have been detailing and seeing the kind of activity that we describe.

You know, it all starts out with one person saying something and then it spreads. And so the thing that I would encourage your viewers that go to Stockhouse is: one individual can make a difference. [45:14]

DARIN: Yeah, I agree. And they’ve seem to have figured that out on their own.

JIM: Well, Darin, your service provides two useful activities, like you said, you’re providing a platform for investors to educate themselves. You also provide a service – a Level 2 where they can find out in any particular mining company that they’re investing in or thinking of investing; they can find out the bids, the asks, who were the selling brokers, who were the buying brokers and follow this activity that we’ve been thinking about. So I hope to help you in the future with this.

DARIN: Well, thanks very much, Jim, and like I say, we’ll keep letting our audience know about some of the educational material you’re building on this issue. [45:56]

JIM: Darin, why don’t you give out your website if you would as we close.

DARIN: We’d love to have people come visit us at www.Stockhouse.com, and join in the discussions on the bullboards about individual stocks or you can go to these different groups where you may find a subject matter you want to engage in as well. Appreciate your time today. [46:13]

JIM: All right, Darin, thanks so much for joining us on the program.

DARIN: Thank you, Jim.

Back to the Future: Repeating the Mistakes of History

Hi, Governor Carter from Georgia, I’m running for President. I want to ask you to help me next year.

In the beginning, Jimmy Carter’s campaign was a lonely one, but through the months more and more people recognized him as a new leader. A man who will change the way this country is run; a competent man who can make our government open and efficient. But above all an understanding man, who can make ours a government of the people once again. Jimmy Carter – a leader for a change.

JOHN: Well, there you go, Jim. Everybody wanted change back in the 1970s because they were dealing with, oh, my gosh, what they thought were high oil prices at the time, high inflation, soaring interest rates and a concatenation of other issues – many again created by the action of government. But we’re being promised again that we’re going to have change here in the future so since we have 143 days left in the silly season here – meaning 143 days before the next US election – let’s see what the top contenders in silly season here are saying about what we should be doing.

Obama: It is time to try something new. It is time for a change. I’ll make oil companies like Exxon pay a tax on their windfall profits and will use the money to help families pay for their skyrocketing energy costs and other bills.

McCain: The point is: The oil companies have got to be more participatory in alternate energy, in sharing their profits in a variety of ways.

Obama: I called for a fiscal stimulus plan to get checks into the hands of hardworking families and seniors right away. Congress passed such a plan and the first checks are now arriving. But since then, hundreds of thousands of more people have lost their jobs, so we have to do more.

Interviewer: As Americans go to the polls in November to vote for the next President, what do you think we’re going to pay for a gallon of gasoline?

McCain: I’m not sure because I think part of it depends on how it looks like we are making advances towards alternative energy.

Interviewer: Can we make advances in that short time?

McCain: Oh, I think we can certainly show some progress in the development of a battery that will take a car 100 miles or so before you have to plug it in. And a – plans for – concrete plans to move forward.

Obama: I’ve called for the immediate creation of a $10 billion foreclosure prevention fund to provide direct relief to victims of the housing crisis.

McCain: One of our proposals is doubling the tax exemption for children from 3,500 to 7,500 dollars.

Obama: But when it comes to the economy, John McCain and I have a fundamentally different vision of where to take the country. [49:28]

JOHN: Do you remember we were thinking earlier in the Big Picture about this disconnect between the verbiage and the static and the noise, and the real world. Listening to these clips I get that feeling all over again.

JIM: We’re calling this segment Back to the Future, but if we look at what happened in the 70s, the US abandoned gold-backing of the dollar. We basically defaulted on our debt to back the dollar with gold. And from that period of time – from August 1971 when we abandoned gold-backing of the dollar, take a look at a graph of government deficits. Government was no longer disciplined and no longer had to balance its books; it no longer had to live within its means. And then also take a look at the money supply growth. So by 1976 we had an unpopular war, we had two unpopular Republican presidents – Nixon, who resigned, and his successor, Vice President Gerald Ford who became president when Nixon resigned. And Jimmy Carter came in on a platform of change: “I’m going to bring change to Washington, I’m going to bring change in policies.”

By the end of the Carter administration we had the inflation rate at 14%; we had 21% interest rates; the national debt had skyrocketed; we had wage and price controls; we had money supply – imagine today, the money supply figures we have today are bigger than the money supply figures that we had in the 70s; and imagine if the prime rate got up to 21 ½ percent – that’s what Volcker had to do. We had oil prices, we had a windfall profits tax, even though they repealed it in 1988 because it didn’t bring in the revenues, and it actually made the US more dependent as production fell in the US. We had an energy crisis. So if you take a look at what happened as a result of his policies: high inflation; wage-price spiral; tight credit market; consumer spending contracted; rising unemployment; stagflation; fossil fuel exploration limited; nuclear energy curtailed; we had back-to-back recessions in 79 and 81 – and what was the first thing that Reagan came in and said, “Government is not the solution, it’s the cause of the problem.”

So here we are, over 30 years later and we got a platform on the five deadly sins that lead to depression and bear markets. And we covered this a couple of weeks ago: protectionism, tax increases, monetary policy mistakes, regulatory overkill; and of course, the last one, which is war. And we’ve got a program here designed to violate every single one of these. Everybody knows who has taken an economics course – and even if you’re a Keynesian, when the economy is weakening, when you have rising unemployment, the last thing that you do is raise taxes. And so basically, you’ve got a program here that’s going to be based on taxation, regulation and litigation. How is that going to bring us out - ? If you raise tax rates to 60% as Obama is proposing – and let me just take the numbers for people – we’re not making this up: the tax rates under Clinton – if Bush’s tax cuts aren’t allowed to be extended and made permanent, the tax rate goes up to 39.6. [53:10]

JOHN: Which tax rate is that, Jim? Just so we know what we’re talking about here.

JIM: The top federal tax rate.

Next. Obama is talking about lifting the cap off Social Security. So if you’re self-employed, you pay 15.3% on all your earned income. Add the 15.3% to the 39.6% and you’re at roughly a little over 55%; and then also there are proposals in Charlie Rangel’s committee to assess an additional 4% surtax and a 5% surtax on income over 150,000 (250,000 if you’re a married couple). There was an article in BusinessWeek – a couple of things that really caught my attention: 1) an article on how the middle class are struggling and they were talking about a doctor who between him and his wife are making about 300,000. I hate to tell you $300,000 in Los Angeles or $300,000 in New York does not put you in the Hamptons or put you in Beverley Hills. In California, in addition to the 60% tax rates that he’s proposing, add 10.3% for state of California – you’re at 70; in the state of California you’ve got the legislature proposing 14% income tax rates. So essentially you would have 75%.

Just staying on the subject of taxes – the top tax rate is 35% right now. So it will go up to 39.6%, but where it really hammers people is the middle class tax rates would go from 10% for most people back up to 28% on income of 26,000. And we did a show on this about a month ago where we had somebody from the Taxpayers’ Union and we did a contrast by tax bracket; that people who got their tax rates cut the largest were the poor and the middle class – and they will see their tax increases go up the largest as a percentage. And the last thing that you do to individuals who are struggling to pay their bills right now because of taxes and inflation – I mean this is so déjà vu to when I got in the business in the late 70s. The two scourges that people were complaining about were taxes and inflation; and that’s exactly what’s going to happen. BusinessWeek did an article – the current issue of BusinessWeek – called Taxing the Not-so-Rich Rich. And it says:

Many Americans who are simply middle class based on their income and the cities they live are being squeezed already, worried that they are going to be burdened with higher taxes because they know when ever they talk about raising the rich guys’ taxes, hold on to your wallet, folks, because they’re coming after your income too, and they’re going to tax you.

And what makes this whole thing outrageous is when you see for example, like last weekend when Fox did this study on earmarks where congressmen are going and benefiting their own pockets by setting up companies and directing a lot of wasteful spending just for the benefit of not only those who contributed to their campaign but their own pockets by the companies that they’re either setting up personally or with family members. And so how has this changed, john? The question is: is this going to be the right changes; is increasing taxes on small business people? And you may not like small business people and you may not like the fact that a small businessman who has taken risks is making more money than you do but, you know, take a look at where the jobs are being created in this country right now. The one sector that has the job-creating machine in this country are small businesses. Most large companies have moved factories overseas; large multinational companies are creating factories and jobs overseas – not in this country. So the last thing that you want to do at a time the unemployment rate is rising at a much faster clip – and by the way, the unemployment rate is understated, some people believe that the unemployment rate is close to 8 to 10 percent; once you start getting over 10% you start getting into depression-level unemployment rates. So the last thing you want to do is take the job mechanism – the job machine that is working well in this country, which are small businesses, and raise their tax burdens to 60%, I mean that’s just insane. It was what Hoover did in 1931 when he raised tax rates from the mid-20s to 60 percent; it literally killed the economy and drove us into a depression and then you had the Roosevelt administration come in, raise taxes to 90% and then to 94%. At that point, why work?

JOHN: What are the small businesses doing in that time? Basically, if you talk to small businesses everywhere right now, they are almost in a predator vs. prey relationship with various levels of government, whether it’s regulation or taxes. They see themselves as being the prey. So when they come under pressure like this, they begin what I call predator evasion tactics; right? And typically what happens – first of all they lay off employees; that’s the first defense, isn’t it, because your employees are one of your biggest expenses so they start trying to economize in that direction. Of course, that kills jobs right there. That’s the first step. What else happens? They just quit investing or get out of the business, shut it down?

JIM: Yeah, because you have to start looking at, okay, what is it going to cost me to build a new plant or spend money on more equipment or hire more employees. It’s that marginal cost. Well, if I increase my revenues and as a result of increasing my revenues I move into a higher tax bracket and the government takes 60%, why do I want to do that? Why invest? Or, if I see my raw inputs into manufacturing or providing a service is going up because of labor costs, what is the first thing that a company does – the biggest expense it has is labor – they start laying off. And it’s no wonder that you saw in the recent unemployment report when the unemployment rate jumped from 5 to 5 ½, and the unemployment was across a wide swath of industries, it just wasn’t the financial or the retail sector.

And so raising taxes at a time the economy is in recession – and if you talk to experts and say, “forget the government numbers, nobody believes them. We’re in a recession.” So you don’t raise taxes. The second thing you don’t do is start a trade war because if you took a look at the trade deficit figures that were reported this week, the strongest part of our trade deficit is exports which are growing in the United States. So don’t go after and start a trade war and kill the one thing in an economy that is still holding up. You know what it’s like, John. It’s a beggar-thy-neighbor ( “you start raising tariffs on imported goods, we’re going to respond in kind.”) The next thing you have is a trade war going on between countries, trade dries up, jobs go away, the unemployment rate goes up, the budget deficit goes up. Take a look at where we were by the end of the 70s under Carter with two back-to-back recessions.

The other thing: monetary policy mistakes; Greenspan slashing interest rates from 6% to 1% and keeping them there for an extended period of time created the housing and credit bubble. Now, Bernanke has taken interest rates from 5 ¼ down to 2 and has created another bubble in the markets, and I think that bubble is the bond market and that’s why you have people like Mohamed El-Erian and Bill Gross – the largest bond fund group in the world – saying “we’re changing our tactics because we see these policies, we think the numbers on inflation are bogus, we see the inflationary policies being implemented and we’re going to take steps and we’re changing our investment strategy.” So we’ve seen monetary mistakes.

And then you’re talking about regulatory overkill. We’re going to have this government blue ribbon panel, we’re going to have this new commission, we’re going to pass these new laws and you just kill the economy with regulation. [1:01:37]

JIM: Both candidates if you notice, both John McCain and Obama – and of course we’re assuming that those are going to be the candidates who are appointed by the various conventions which are coming up this summer, but that seems to be a given right now – but both of them are talking about windfall profits taxes on the oil companies and then we’re going to roll those into alternatives. This is the justification. We’re going to this money and we’re going to force them to do this. Here’s the problem – it’s like you and I talked about – we have this crisis window here and the alternatives that they’re talking about will not be viable for 5 to 10 to 15 years. So we have this gap in here in which this worldwide competition for oil is going to be downright fierce. And what they’re doing is they’re taking them and tying their hands behind their back and saying, “you can’t do anything.”

JIM: Yeah, I mean somebody was commenting on probably one of the most intelligent things I saw mentioned on the discussion of America’s oil crisis: We do have a policy – that policy is to stimulate demand and restrict supply. And one of the oil executives when questioned by one of the senators said, “well, Senator, you haven’t allowed us to build a refinery; you have denied us access to where the oil and the natural gas is. It’s very difficult putting in a pipeline, you won’t let us build LNG terminals…”

San Diego tried to get an LNG terminal (or Los Angeles did) and the company was blocked from it so they had to go down to Mexico to build an LNG terminal because they couldn’t build it in the United States. And as far as profit margins or windfall profits tax – where they mislead people is people act like if Exxon makes 10 million dollars in profit, they’re not paying taxes on that. They pay 35% income tax – that’s not mentioning the royalty tax, the sales tax and the various import taxes because as we have shown on this program the largest profiteer from energy prices are the government. They make more money on a barrel of oil than the companies that find, produce and distribute the oil. And as far as windfall profits tax, I mean if Exxon’s margins went from 10 and 11% where they’ve been historically to 20% like a lot of technology companies, you could say, yeah, they’re making – as a percentage of sales today – a heck of a lot of money.

But you know, let’s just take Exxon. In 2003, Exxon’s profit margin was 10.1%; in 2004 it dropped to 9.6; in 2005 it went to 11%; in 2006, it went to 11.7%; 2007, it dropped back down to 11.3%. We’ll go to ConocoPhillips: in 2003, their profit margin was 5.23%; the next year in 2004, it was 6%; 2005, it was 7 ½; in 2006, it was 9.3; 2007, dropped back to 6.9. And that’s trend, by the way, that you can see across the industry as that profit margins at 125 oil are lower than where oil was at 30 dollars because costs in the energy business are going up at around 25 percent a year. Four years ago you could get an offshore oil rig and lease it out for $70,000 a day; today, you’ve got one company in Brazil – Petrobras – that tied up almost 80% of these offshore rigs and the cost of these rigs have gone from $70,000 a day to 700,000.

And the good thing about this is people are waking up – let me see if I can find this article in the current issue in BusinessWeek they find out in a Gallup poll, only 20% of those surveyed blamed the oil companies; and they’re blaming it – well, currently, right now where the media is hammering – speculators; – and also Congress – that’s where the blame should be. When you have had in practice a policy of 30 years of restricting access to energy, what do you expect when the world grows and the demand for energy grows and you’re doing everything to stop adding supply? You notice nobody is talking about increasing supply.

And like you said, they’re talking about alternatives. Well, great, solar and wind. Well, that’s going to be great, it’ll maybe power your house 5, 10, 20 years from now when it becomes more commercially viable, but right now we have a liquid fuel problem. Your car, your boats that bring supplies to the United States, an airplane or a train runs on diesel fuel. And right now, China’s imports of diesel fuel are up over 700% from the previous year.

This weekend we went out sailing and my fuel gauge was close to empty and I said we better swing by the fuel dock. And John, what do you think I paid for diesel? [1:06:30]

JOHN: I would guess it was California diesel that was somewhere between 6 and 7 – is that a fair guess in your part of the country?

JIM: I paid 5.69 plus a sales tax of almost 8%. So the government of California obviously is benefiting from sales tax to their already existing fuel tax. So it came up to $6.15 a gallon for diesel fuel. Now, thank goodness my sailboat only has a 20 gallon gas tank, so it was a little over 120 bucks to fill my tank up. But you know, that’ll last me for one whole year, so thank goodness I had a sailboat. The poor guy behind me filling his [tank at the] dock, a big sport fisherman and I just couldn’t imagine – I know he bought over 3,000 gallons, so you imagine what that cost him. [1:07:14]

JOHN: Yeah. You were mentioning something too about the ethanol which they’re loading into marine fuel now. It is wreaking havoc on the fiberglass tanks. I didn’t know they had fiberglass tanks.

JIM: Yeah. A lot of some of the production motorboats have fiberglass gas tanks and the ethanol is eating into them so they’re running into problems with the gas tanks, and that presents a real danger because gasoline can be very volatile. And I asked the guy at the fuel dock, what are these big power boats – you know, here is this guy with over 3,000 gallons and he’s filling his tank. And I said, “what are people doing?” And he said a lot of the people that have motorboats just take a look at the bay, you don’t see as many of them out there. We were out all day Saturday, great windy day on the bay and John, you just don’t see the motor yacht traffic. And the guy at the fuel dock told us that a lot of the people that have motorboats, fishing boats etc., are not traveling at fast speeds because the faster you push your engines the more fuel consumption. And so even the airlines are traveling at slower speeds which [results in] more delays today because at slower speeds, you know, you burn less fuel. So the same thing is carrying over.

And there is not one thing that this windfall profits tax – you know, what windfall!? The profit margins of the oil companies that have to spend – there is no other industry in the world that has to spend as much in terms of capital expenditures to build a refinery or explore for oil – and it’s amazing that if you go to any of these oil companies their costs are going up in terms of not only finding oil, their reserve replacement ratios aren’t going up. People are talking about the cost of energy going up; from 2003 to 2007, Exxon Mobil’s finding costs have gone up 475%. From that same period their lifting costs – okay, you know, their finding costs have gone up but what does it cost to get the oil out of the ground – their lifting costs have gone up 60%. So it’s costing these oil companies more, which is why their profit margins have been in this very narrow range. Like I said, they were making more money on a barrel of oil at 30 bucks than they are as a percent – now, I want to be clear on that because people talk in gross dollars – and because the price of oil has gone up five-fold, Exxon’s sales are up because the product they sell has gone up five-fold, but their percentage of profits has been remarkable, it’s stayed within that same narrow trading range. The same thing if you look at a ConocoPhillips or a Chevron or a Shell or any of the major oil companies.

But one of the proposals that we have that we see in this crisis window – it takes a politician to turn a recession into a depression; it takes a politician to turn a correction into a major bear market; and it’s remarkable how we are promising change but, John, this is just a resurrection of policies that failed in the 70s, and he we are 30 years later. People forget. Wait a minute, we tried that. It didn’t work in the 70s and here were the results. [1:10:26]

JOHN: To look at really what this all means, let’s look at how things were at the beginning of the Carter administration. And this doesn’t, by the way, hang totally on President Carter; we’re talking about everything Congress did and his administration did between 1976 and 1980. And remember, I’ve been saying if things keep going the way they are, the next occupant of the White House will most likely be a one-term president because people will be ready to throw everybody out by the time we get to that point.

So in 1976 – let’s pick inflation, what were the numbers?

JIM: I can remember under Carter because I was in the corporate world at that time and we were restricted to 7% wage increases because that was what companies were asked for. So every company could not raise wages beyond 7%. But as I recall, at the end of his administration inflation rates were running at 14%.

JOHN: Right, and it started at around 5.8. Unemployment, which came in around 7.6%, it was 7.0 when he left – no change in the unemployment rate, which was considered high at the time. The national debt went from 533 billion to 908 billion and the Federal deficit from 4.7 to a whopping 59.6 billion. I mean that’s a radical increase.

JIM: And the problem was printing money. You know, towards the end, Carter recognized that he had to do something and he appointed Paul Volcker and that’s when Volcker came in. He took over from G. William Miller, and before him Arthur Burns, who just basically flooded – but Volcker was appointed Fed chairman and then he began to fight inflation by restricting monetary supply and raising interest rates; and we got to a prime rate of 21 ½%. And that’s what – if you talk to the people, the PIMCOs, the managers, people see rising inflation and rising interest rates; and as a result of this, like I said, in fairness to Carter, too, don’t forget, Nixon took us off the gold standard because we were fighting – we had the Johnson Great Society programs at a time we were fighting a war in Vietnam; and we’re trying to have guns and butter again 30 years later, a war in Iraq and Afghanistan along with increased social programs.

And Nixon implemented wage and price controls which failed miserably. Carter tried to do it through moral suasion – that didn’t work. And here we are, talking about new spending programs instead of letting the market correct itself in real estate. In other words, real estate has become unaffordable for many Americans, so rather than allow the price of real estate to come down, for banks who made those loans to fail, we’re coming up with programs to prop it up. I mean this is like – it’s almost like taking a playbook out of the Hoover administration and the Roosevelt administration. And that’s why I believe we’ll enter this crisis window and we will commit one wrong program after the other, which will only aggravate the situation and that’s why capital is fleeing the United States and getting out because everybody can see this coming. [1:13:31]

JOHN: There were some other trends that were set during that time, Jim, as well. If we look at the fact that, first of all, the superfund for environmental clean up was created in 1980, right at the tail end of that, and that taxed oil and chemical companies to do it. Now, some of that worked in terms of clean up, but other trends that were set that were negative as we began to unleash the giant regulatory, environmental issue of questionable benefit in many areas. Much of this has now run amok. At the same time, we had Three Mile Island, if you recall. That was used as a pretext for opposing nuclear power expansion and as a result of we set a 30 year precedent of not building power plants, leaving us in the power quandary that we are in right now – that was one of the other trends that went from there.

There were huge programs that were started to research fuel efficiency for alternative energy. They were talking about alternative energy in 1980. Where are they, Jim…? Not much further along than they were in 1980. It’s amazing. We’ve really come full circle on this and we’re poised to go this circle again.

JIM: Yeah, we’re absolutely committed now to a program to commit the same errors of the Great Depression and the failed policies of the 70s. And it’s being resurrected and repackaged as change when it’s nothing more than taxation, regulation and litigation – and protectionism. None of this worked in the past and it’s not going to work in the future.

JOHN: And you’re listening to the Financial Sense Newshour at www.financialsense.com. Coming up next, we’ll look at your calls on the Q-Line.

Part 3

Q-Calls

JOHN: Welcome back to the Financial Sense Newshour. Time for the Q-Lines here on the program, by Q-Lines we mean ‘Question Lines.’ We leave this line open to record your questions 24 hours a day. You can call it toll-free from the US and Canada, (800)794-6480. That number is toll free from the US and Canada. It does work from the rest of the world but it’s only toll free from those two countries.

And please remember as we respond to your inquiries the radio show content on the Financial Sense Newshour is for information and educational purposes only. And should not be considered as a solicitation or offer to purchase or sell any type of security. And responses here to your inquiries are based simply on the personal opinions of Jim Puplava. And because of the fact we don't know enough about you and your circumstances, we can't take that into account you suitability, your objectives, or your risk tolerance; and as such Financial Sense Newshour is not liable to any person for financial losses that result from investing in companies profiled on Financial Sense Newshour. Remember to always consult a qualified investment counselor or advisor before you make

First caller today. We have a lot of them. Please remember to keep these calls down around a minute or so; we can’t have long run-ons. Just give us your name and where your calling from – first name is fine. And one of the reasons for keeping the length down is like today we have 45 calls so far and those were the ones we screened out for legitimate questions and things of that nature. And we may not get to all of those – that’s why it’s important to try to keep the questions and the answer short.

So, first caller is from Mark in Houston.

Hi Guys, this is Mark calling again from Houston. Calling you on a Thursday, we’ve got gold down, silver up, oil up, stocks up over 200 points, the dollar was down and interest rates on Treasuries were up. Do you have any kind of comment on a market dislocation such as this? This was a very freaky day.

JIM: Mark, I think you were referring last Thursday to comments made by Trichet, the current head of the ECB, indicating that as soon as next month the ECB would begin raising interest rates from the current position of 4% to 4 ¼ and that weakened the dollar. And remember, when the dollar is weakened the stock market does well and that’s why you also had commodities like gold and silver doing well. [2:33]

Hi Jim, Hans calling from Oregon, Wisconsin. First of all I’d like to thank you for addressing my point last week regarding unrealistic expectations for domestic supplies of oil; I feel like you made an honest effort to answer my concerns in a straightforward manner – which leads me to a question to you: Do you feel like there are any relatively honest, sober assessments of how much extractable oil is still in the United States in areas that are currently off-limits, including, say, the continental shelf. I’ve followed The Oil Drum and sites like that pretty closely and I don’t recall seeing anything.

Second point is: I want to thank you for some of your guests who are just terrific like The Ultimate Dividend Playbook. That was just a wonderful interview and I also like the straight talk we had from the various mining companies this last week. The last thing, I hope we’ll be hearing from Zapata George again.

JIM: You know, Hans, they do have some reasonable estimates of what exists offshore – a lot of that can be pinned from satellite technology, seismic imaging that the oil companies have done. These are estimated guesses as to what lies. For example, they are drilling offshore California right now going back to the 80s. They’re trying to stop it. But based on what we have – but we know like, for example, on the beaches of Santa Barbara you’ve got oil washing up ashore from seepage. So we do have some fairly close estimates in terms of what we think that is. Now is this going to solve our problem and make us energy independent? No. But it might ease the transition to alternative fuels because remember, a lot of the oil that the United States is getting right now from sources such as Saudi Arabia and Mexico and Venezuela is dropping. Three or four years from now, imports from Mexico will be zero. So you know, we need to start asking ourselves how are we going to replace as Chavez keeps reducing his supply of oil to the United States, or Mexico because of their oil fields going into serious decline and no longer being able to supply us. And so we do have realistic estimates and I would say their best use would be to help ease the transition till we find alternatives. [4:50]

Hi Jim and John, this is Tim calling from Ireland. Guys, I’ve been listening to your show for over a year. I really love it. I never miss a download of an mp3. A couple of quick questions. Hypothetically, let’s say natural gas has increased by 60% in the past three months, yet when you look at an ETF chart it doesn’t reflect the 50% growth. Can you explain why that is? The other quick question: Do you think natural gas, zinc and sugar are good via the ETF route and which ETF would you recommend? Lastly, what is a good hedge for me say because my funds are in euros with a weak dollar, how can I hedge against that. And lastly with the investment in the ETFs I’ve got, I’m looking to achieve 50% per annum growth. Is this achievable? Or if it’s not, could you advise a route

JIM: You know, Tim, trying to get 50% a year every single year, boy, I tell you, those are some pretty big expectations, even though, you know, this year you’ve got natural gas prices that are up about 74%. You’ve asked a number of questions here – I do like the ETFs. I don’t make specific recommendations on ETFs. They do have ETFs in oil, they have ETFs in natural gas, they have ETFs that invest in natural gas and oil companies. You might look at a combination. I think these stocks are underpriced compared to the commodity – whether you’re looking at energy or you’re looking at gold stocks.

And a way to hedge against a falling dollar – if your money is in euros, remember, the euro was going up against the dollar. But you might want to hedge against the euro. Listen to my guest in the second hour, Louis-Vincent Gave, who talks about widening bond spreads within the ECB itself, especially between Germany, France, Spain and Italy. And you could see the euro unravel over the next couple of years. So you might want to make sure that your also hedged in real money which is gold and silver, so you might want to look at the ETF in gold and silver as well as a mining company ETF. [7:04]

My name is Kevin, and I’m oil-aholic. That’s a line I should say.

Jim and John, this is Kevin calling from central California and I am an oil speculator. I’d like your comments on things – speculators don’t move the market. A couple of years ago, I invested in the USO which invests in futures and it’s not exactly directed but has done pretty well. I wish I had more of it, but – anyhow, they’re buying the market for me every – they keep rolling this thing over and that would drive up the price because they’re buying on long; right? So I’m buying. They have to buy for me and probably a lot of other people like me which wasn’t available before. When I first started listening to you there wasn’t these types of ETFs available and now there are all sorts of exchange traded notes and ETFs available to go long commodities. So wouldn’t that actually drive the price up?

JIM: You know, Kevin, there are two sides to a trade. If somebody is going long, somebody is going short. At times the longs overwhelm the shorts and the price goes up; at other times, the shorts overwhelm the longs and the price goes down. I would say that if you were investing in this area and taking delivery and taking it off the market for the purpose of speculation then you’re having a direct impact; but you know, to say that people coming into the market because of the rate of return by supply and demand, that’s what you want to happen in a market when supply is not growing fast enough to meet demand. How does that happen? The price goes up, more people come in the industry; if they can’t find enough oil or oil is getting harder to find, the higher the price, that brings more out of the places – oil into the marketplace, and also makes alternatives more affordable. So saying that speculators are the cause of this is just simply playing the blame game. That would be like saying that 1995, the bulk of the money that came into the stock market came in from 1995 to 2000 by the investment public through mutual funds or individual trading. I didn’t hear saying, well, gosh, the reason stocks were going up and it’s terrible is because more investors were coming into the market. When there is a demand, when demand is greater than supply then prices go up and money is attracted to that market because with this supply and demand imbalance; actually coming into the market are aiding the recovery process by driving the price up. [9:36]

Hi Jim and John, I love your show. It’s Nelson from Winnipeg. A couple of quick questions. One is I’m thinking about naked short selling: now what would happen if somebody took possession of about 90 or 95% of the shares of some company and delisted it? I was thinking that might cause the ultimate short squeeze. I don’t know enough about this but you might give it some thought. My second comment was I’ve just finished a book called Dirt: The Erosion of Civilization by David R. Montgomery. Basically he’s talking about ‘peak soil’ – a term he doesn’t use but I think that’s what he’s getting at.

JIM: Nelson, your first question: If people took possession of their securities and delisted it, you would have a real problem, the ultimate short squeeze. You’d have the same problem if everybody switched their margin accounts into cash accounts or took delivery of their securities. [10:23]

Hi, this is Chris calling from Canada. I’ve got a question regarding a small cap silver mine and it had a great deal that came out this week, it looks like it’s going to be financing half of its future silver production by Silver Wheaton and also Silver Wheaton is putting in the money to actually finance a new mine that they’re actually starting up. Now it looks like they had a good pop on that news, however, it seems there has been nothing happening after that pop. And I’m just wondering if that might be right now one of those manipulation schemes in order to keep the share price down, so as to discourage investors so they unload their shares. Maybe you could enlighten some of the holders of that stock – I’m sure you know which one it is – and give them some heads up so that they can buy more and put it to the shorts.

JIM: You know, I think it reflects more the price of silver going down. You know, after hitting a high on the day I’m answering your question, which is Thursday, silver in the futures market closed down 37 cents at 16.49. Pay attention to the expert series. I’m taking the weekend off; Eric King will be sitting in and he will have an exclusive interview with Ted Butler and Ted would I’m sure be glad to share some input in terms of what’s going with the silver market. [11:33]

Hello, Jim and John, this is Kim from Denmark. I believe in peak oil and I also believe in rationing energy in the near future. I could imagine that gold producers could be cut off from it because the government would use the energy for more vital issues, like in

JIM: You know, Kim, it is an issue that we’re looking at with mining companies today that they’re in a region or area that has access to energy. I mean we took a look at one of the companies that is going into production – a company called Minefinders – they actually are powered by diesel which is actually subsidized by the government in Mexico, which is now informing the United States, it’s going to take more of its own energy and export less to the United States to take care of its own industry and its own people. So energy as part of the equation is a very big issue when we’re looking at mining companies. [12:35]

Hi, Jim and John. This is Richard from North Bay, San Francisco. I have three quick questions for you: Who gets the dividends from the shares that are represented in an index fund. And my second question is: If a brokerage or other trading entity makes the short sale of US Treasuries, is this treated any differently from naked short sales of just ordinary equities? And the last one is: Are sovereign wealth funds permitted to sell equities or debt paper short?

JIM: You know, Richard, your first question – the dividends in an index fund goes to the fund itself and ultimately each shareholder either it’s reinvested in additional shares, or distributed if an investor decides to take the dividends in cash. Naked short selling a stock is different than short selling Treasuries; when you short sell, first of all, you’re borrowing the Treasuries in that short sale; naked short selling is you’re not borrowing stock, you’re counterfeiting stock – you’re just making it up as you get into it. And then finally, sovereign wealth funds: Could they short stock if they wanted to? I’m sure they could because it’s only the charter of the fund. But most of these sovereign wealth funds are being set up as investment funds and most of them are long oriented. [13:59]

Jim, this is Greg calling. A quick question on naked short selling. I was just wondering how these guys select a stock to short. For example, Tyhee – I know you had talked about that on the last show – I was wondering how did they select that stock?

JIM: You know, they usually take late-stage companies that have very successful news. You take a look at, for example, Minefinders. You’ve got a situation there where the company is going into production – it’s going to become a producer, that means the company valuation changes. I mean the short position has gotten to be so large it’s almost 15% of the outstanding shares. But they pick on successful companies and then they’ll try to drive the price down and profit from it. This is just a personal opinion, but I think the short position in Minefinders is so large now, I don’t know how these guys are ever going to cover. [14:50]

Hi, Jim and John. This is Stan calling from New York. I just had a comment on last week’s show. I’m sorry I want to disagree with you, but I kind of think with the emerging economies in the world, I think they will also suffer like the US is going to suffer in the near term future because their currencies are backed by dollars which are also depreciating; and also we have a limited supply of oil, so as these countries grow it’s only limited to the amount of oil that we have. So that’s my disagreement with what you said last week.

JIM: You know, Stan, their currencies are pegged to the dollar but they’re breaking away from those pegs. So as they break away from the dollar, they have less of an impact. For example, if you take oil prices, which are up five-fold for US citizens, for European citizens they’re only up three-fold; and for many Asian countries, especially like China now it’s begun to gradually depeg its currency from the dollar, it lessens the impact of prices increases. And if you take a look at the fastest growing economies, the Chinese have been very successful in aligning themselves with long term contracts with oil from not only Middle Eastern producers but also producers in Africa; and they’re gaining – for example, in the US we used to get 1.7 million barrels a day from Venezuela, today we’re getting 1.4. 300,000 barrels a day from Venezuela are now going to the Chinese on a long term fixed contract. Those are 300,000 barrels that are never going back to the United States, and that 1.4 that we get from Venezuela will gradually decline as well and go to other countries. [16:32]

Hey, Jim and John. This is Tony from Toronto. I don’t have a question, just wanted to make an observation we saw this week Bernanke was talking up the dollar. That’s very unusual. Usually they defer to the Treasury. But it was quite interesting to see how the media gobbled it all up. I think what really happened is I think Trichet and Bernanke were talking and Trichet gave the heads up because ‘tomorrow I’m going to warn people that I’m going to raise interest rates.” And I think that’s why Bernanke came out the day before and started talking up the dollar because he knew the damage that was going to happen. I bet this week all of the Fed governors will be back talking about the economy, considering the unemployment rate disaster on Friday and the market really took a tumble. I’m pretty sure all the Fed governors this week will be talking down the dollar and talking about how the Fed’ll [inaudible]. It’ll be interesting to see what happens this week.

JIM: Tony, actually it wasn’t the day before Trichet, it was actually almost a week before that Bernanke started the strong dollar policy. And all this week you had the open mouth committee – the Fed governors actually talking tough on inflation. So they’re trying to prop up the dollar through the open mouth committee. [17:39]

Hello, Jim and John. I want to thank you for your program. You have no idea what your program means to me and probably to hundreds of thousands if not millions of other people that listen to it every day.

Anyway, now for my question. It has to do with naked shorting. As a stockholder, I own shares in some of these junior mining companies and some of the bigger mining companies also; how do I know – I guess there is no way to know – whether I’ve got shares that are naked short shares – in other words, counterfeit shares or whether they’re real – especially in the juniors. And I’m strongly considering requesting my certificates and I’ve also recently been told that after June 30^th it’ll be much more difficult to get those certificates. Anyway, if I get those certificates, does that mean that my shares are legitimate or is there still a possibility that those would be counterfeit shares. I think this is probably a question that is on a lot of people’s minds, and I sure would appreciate you giving me some kind of direction on that. And by the way, some of those shares were purchased on the pink sheets, and I don’t know if that would make a difference.

JIM: Let me address the question – when you have a margin account you are allowing your shares to be shorted. In terms of a naked short position, just because you have the certificates it creates a dilemma as Wes Christian pointed out last week if you listened to that interview. They were looking at a company – a major brokerage firm in the United States that showed that it’s customers owned 12 million shares of a particular stock – he didn’t say which one – and when they looked into it that brokerage firm only had one million shares at the DTC. So let’s say that company has 50 million shares outstanding and there’s 100 million shares out there because of naked short selling, and if the 50 million shareholders requested certificates, what about the other 50 million shareholders that own shares and paid for the stock and were sold naked short positions. I don’t have an answer to that in terms of how that would be resolved. That’s ultimately the nightmare scenario.

Or let me give you another one: this is a hypothetical mining company that’s going to production in Mexico and it has 50 million shares and the short position is almost 15 to 20 percent of the stock, what if that company gets taken out by another mining company? You have an issue here where the mining company thinks it’s going to buy this company for 50 million shares and it turns out there are 55 or 60 million shares when they go to settle up with everybody. In other words, there is a 5 or 6 million naked short position out there that is settled up. So there is even another dilemma that could be an issue. Just because you have the certificate, who knows what’s going to happen here? I mean we are really moving in – like I said, that’s the reason we’re calling this the Crime of the Century. There are moral dilemmas here and actually financial issues here that I don’t think anybody has even a solution yet for this. [20:37]

Hi Jim and John, this is Nick from Ottawa, Canada. Jim, I’d like to have your thoughts – I’ve got the [capability] to go out and take out a loan to basically invest money. I can do that either through a line of credit or through financing my house. I have a very stable job. If I don’t commit a crime I’ll have a job for life. And since [I will be investing in] two Dow stocks for the next 10 to 20 years, as it provides good dividends; one basically provides a 6% dividend, and the other one is now at a 4% dividend. Which of the two alternatives would

JIM: Nick, I’m not big on borrowing against the house, but you say you’ve got a job. It sounds like you can afford to make your payments. I’m not a big advocate of borrowing money on a house and using that to invest. But if you were picking stocks and you knew that the dividend was secure – and be careful when you’ve got dividends at 6% on Dow stocks, especially some of the financial stocks that those dividends aren’t cut because if you borrow at a rate of 6% or 5%, and you’re getting a dividend at 6%, you’re assuming that dividend will grow each year. What happens if that dividend is cut in half to 3%. Now you’ve got negative cash flow problems. So that’s why I’m not big unless you’re picking a company that doesn’t have any risk of running a dividend cut. [21:54]

Hi Jim and John. It’s Chris in the sunny UK here. I want to talk briefly about ETFs and this question to you: If you were selling an investment product, would you slag it off as being a future poor performer? I think you wouldn’t. Well, that’s exactly what Barclay’s have done with silver. In mid-January, a commentator – I think her name was Mary – said that silver performance was going to be poor and, again in May, they did exactly the same thing. You can see it on Kitco. And yet Barclay’s has got the biggest silver ETF in the world. So why would a company selling silver through an ETF slag its future potential performance off.

My theory is I’ve heard it a couple of times from some other people like commentators, but guys seem to come out about the ETF that they’re merely vehicles designed to keep investors out of the commodity. They’re designed by the banks, they’re just paper, they haven’t actually got any silver or gold – they don’t want people to invest in the commodities, they want your money into a silver ETF which is merely just paper. So my suggestion and I don’t know what you guys think of this, is just tell people don’t touch ETFs because they’re just a con. They’re just like – it’s a banking product. They don’t want people to invest in commodities; they want people to buy paper. I really think you guys should be knocking ETFs and not promoting them. I’d be interested in your views on that.

JIM: I’ve always commented whether you’re looking at the gold ETF or the silver ETF, we’ve always advocated owning the bullion directly rather than the paper. They’ve simply become trading vehicles and that’s what their primary use is today. But you know what, if you don’t know anything about the futures market, investing in an ETF that invests in either agricultural commodities or oil or natural gas or for that matter agricultural stocks or oil stocks, I think that’s a good way to invest. I mean it’s essentially a mutual fund. I like the equity type ETFs that own stock and in certain cases I actually like the future ETFs that actually own the physical commodity – it’s one way to participate. I have no desire to go into the futures market on margin and buy a futures contract. So I do believe that they do allow you – as far as somebody talking down a sector even though they have a product, it could be their particular views, you know, it’s not unusual. I’ve seen a lot of the major brokerage firms talking about – at least they used to in this decade – talking about lower oil prices or oil is only because of weather, it’s only up because of the war, et cetera. I think they’ve changed their tune now as they look more into the statistics of what’s happening with supply and demand. You know, I disagree with you. I think ETFs provide a very necessary function and viable option for investors to participate in certain sectors of the economy. [24:49]

Hi, this is Bob from New York. Thank you for your thoughtful news each week. In the Weimar Republic as their currency went to zero, their stock market went to infinity. Do you believe our stock market will go to infinity? Or do you believe like your guest last week, Warren Brussee, that shorting the market is a permanent strategy.

JIM: You know, Bob, you’re correct. During the Weimar Republic the German stock market almost went to infinity and I expect that would happen. There is a flight to real assets. You’re seeing it occur right now in commodities, and I think you’ll eventually see it in stocks. I mean just read Mohamed El-Erian’s new book When Markets Collide; read the comments by Bill Gross at PIMCO, they’re changing their investment strategy to equities almost 45%, given this inflationary environment. So I see stocks will eventually go up. [25:45]

Hello, I’m Rich in the Washington, DC area. I have solved the naked shorting problem. Please tell me why this would not work. What companies need to do when they’re being shorted into oblivion – naked or otherwise – is to pay a dividend. Now, some of the companies might say we’d rather put that money into building a mine, but in these kind of situations I think that that’s short-sighted. Before they have a stock offering they should certainly pay a dividend, force a short squeeze because nobody wants to be short a stock when they have to cough up a dividend and especially these naked shorters force them to mess with another company. And then that’ll cause the price to go way up and when they do a stock offering they’ll get even more funds than they would have and they can more than pay off the dividend. Anyway, tell me why that wouldn’t work.

JIM: You know, Rick, I – would work, but let me tell you an easier one. Everyone that has a margin account with mining stocks close out their margin account. You would force the shortsellers to come into the market and have to buy the stock at a premium. That to me would be even more effective. [26:38]

Hi, this is Diane from Florida, and I have a question on infrastructure stocks. Do you consider railroads, electric utilities to be infrastructure investments – GE also because it has nuclear power provisions in it?

JIM: Diane, GE is most definitely an infrastructure – gosh, they’re in just about everything from alternatives to engineering to building efficient jet engines, railroads cars, wave energy, wind turbines, nuclear power. Railroads are definitely infrastructure. Utilities are infrastructure – I’d be very careful investing in utilities now, especially if Congress goes ahead with cap and trade, which is just going to impose almost a 6.7 trillion tax on utilities and the American consumer that is going to drive their utility bills up almost 50%. It’s going to drive up gas prices, and they’re hell-bent to do that. So far it’s been stopped, but that could change, for example, if Obama became president or even John McCain because they’re both advocates of cap and trade. And that would impose an undue hardship on utilities, so I’m not a big believer at least in US utilities at this point – other than ones that are investing in nuclear power. [28:02]

Hi, this is Larry calling from Victoria, British Columbia. I just wanted to leave a comment regarding the Crime of the Century. By fraudulently increasing the number of outstanding shares of a company, naked short selling is dilutive and destructive to the collective interests of all shareholders, so it has similar harmful effects, for example, as a breach of contract by a host government; a legal challenge over a companies ownership of a mineral claim or a hostile takeover that’s prejudicial to the interests of the company’s shareholders. Once a company becomes aware that its shares have been counterfeited in this way, it seems to me that the company on behalf of its shareholders has a similar fiduciary duty to vigorously investigate and take whatever regulatory remedies and legal measures that are available to defend itself, including lawsuits. I agree with you, Jim, that only by being vigilant and responding aggressively to naked short selling can this practice be totally exposed and the perpetrators punished. As with any cancer, public awareness, early detection and effective intervention are all crucial. In my opinion, if the individual affected companies are far more proactive in this matter, this ugly disease might be essentially eliminated or at least have far fewer incidents.

JIM: You know, Larry, we addressed this in the Big Picture this week when we talk about Crime of the Century Part IV. [29:12]

Hello, Jim and John, this is John from Illinois. No question but just a comment. Listening to the program, I wonder what you think that the powers-that-be are incompetent. They don’t know what they’re doing; that’s why we’re in the mess we’re in. But do you ever think that perhaps that all of this is being done in purpose. Could be. Look back in history: 1907, bank panic engineered by the Rothschild controlled Morgan banking interests; the crash of 29 that was also engineered by the central banks; and now we are in another fix. It’s problem, reaction, solution. They create the problem, the public has the reaction, they offer their own solution. That bank panic of 1907 by the way, set the stage for the introduction of the Federal Reserve Act. Just some thoughts there that you might

JIM: John, thanks for the comments. I would say probably to that, the greatest problem is we never learn from history. [30:08]

This is Jeremy from North Carolina, and I have two questions. The first is: why are politicians and economists always so scared of wage inflation. They love every other kind of inflation, but far be it that the American people in general start earning a better wage. Why is this so scary for them?

And for the second question: With a hyperinflationary depression followed by a real depression, everyone is always saying at the top, get out of your commodities and energy and go into US Treasuries and foreign currencies. Is this going to be either possible. If everything crashes, how will the US Treasury be worth anything; and how will capital controls keep us from getting foreign bonds and foreign currencies. These are the things that I’m having trouble figuring out because they’re making enough sense.

JIM: Jeremy, the one thing that politicians don’t like is as we mentioned when we talked about the four phases of inflation and we talked about the quote from Jens O. Parsson’s, the first stage of inflation when assets are going up, whether it’s real estate or stocks, that’s the good form of inflation – and they love that. The bad form of inflation is when the cost of goods start going up as we’re seeing today in commodities or workers start demanding higher wages to compensate. That’s –to politicians – the bad form of inflation. It’s kind of like, okay, we do something, they don’t like the side-effects. When the first phase of the side-effects are rising assets prices, everybody loves that; but when the bad side of inflation they’re against it. [31:45]

Hi, this is Mara from North Carolina. A question about gold: sometimes I see it written or hear that it’s a store of value, or that it’s no one else’s liability. I don’t really know what either of those phrases mean, so would you explain it.

JIM: As a store of value, it holds its own in times – if you look throughout history if you own gold, you’ve been able to maintain your standard of living. In terms of a liability, if you invest in a company, a company has liabilities; if you invest in Treasuries, it’s a debt instrument depending on the liability of the US government. If you buy a corporate bond, that’s a debt instrument, it’s a liability. Gold is gold. It’s worth what its value is and it always holds its value against depreciating currencies. And you can see that, Mara if you take a look at what has happened to the value of the dollar. If you look at the Dollar Index and then cross-reference that with a chart of gold, and you will see as the value of the dollar has gone down, the value of gold has gone up. And it’s like that in other currencies as well. [32:50]

Greetings, Jim and John, this is Gary from Madison, Wisconsin. I just want to commend you guys for bringing up the problem with shorting of junior gold mining stocks or silver stocks. You know, I’m pretty livid about what’s happening there. If you think of all the work that goes into finding, assembling a team to find a resource, bring it along, and do the drilling and all the investors that do all the hard work to seek out these great companies only to have them held down and pushed lower. I just wanted to recommend on Jim Sinclair’s site, he has on there a ‘wanted’ poster: $50,000 gold reward for information leading to the identification of the manager or managers of the hedge fund pool operators illegally shorting junior gold shares. So let’s all pull together and make a difference, and put these guys in their place. It’s time that we investors who have done all our hard work and miners and the managers benefit from all the hard work turning a good product and bringing these mines into production.

JIM: You know, Gary, I’m glad you bring that up. Jim Sinclair, I commend him. We may join him in posting a reward for information leading to any hedge fund that is involved in illegally shorting junior shares. For example, maybe you’ve been a trader working for one of these hedge funds or you’ve worked for an investment bank and know of one of these hedge funds. So I do commend Jim Sinclair for doing that. And if you have information – if you formerly worked for this company, either an investment banker that is doing this, there is a reward out there. But you know, Gary, one thing that you can do is report this to the authorities and if we all do that, perhaps we can effect some change. [34:40]

Hola, Jim and John, this is Richard calling from Buenos Aires, Argentina. Jim, you’ve spoken about how during economic crises governments will sometimes lead their countries into war. This often, as you’ve said, acts as a distraction to economic woes. But other than the advantages to war-profiteers, does war have any overall economic benefits to countries that may find themselves in the midst of a depression?

JIM: You know, Richard, I would hate to even contemplate a world war, or like World War II, especially with nuclear weapons. If there’s a world wide war, it will be a push-button war because it’ll be missiles, not armies on the battlefield – those are just conventional wars. No, it has no economic benefit. And one of the reasons why wealth has been built up over the last 60, 70 years is because there hasn’t been a world war. If you think about the destruction to Europe or to Japan – the buildings, the factories that were destroyed, the lives, the talent. War destroys wealth, it doesn’t create wealth, so there is no economic benefit to war itself. It reminds me, John, who was it, Clausewitz, the true enemy of war is war itself. [36:00]

Hi Jim and John. This is Kevin calling from Los Angeles. My question to you is regarding the FASB requirement 157 and its potential impact to brokerage companies such Goldman Sachs, Lehman Brothers et cetera, of the restatement of fair market value of Level 3 assets. If you can help me understand that requirement I’d greatly appreciate it.

JIM: You know, basically the statement defines fair value. It establishes a framework for measuring a value of a security. And what it does is you have to start reporting the securities in measuring them rather than mark-to-model and some of the other different techniques that they do this. And it basically forces a company to come clean with something where before the value was simply stated. The change to the current practices is resulting from the application of statements that relate to the definition of fair value. The method uses a measure of fair value and expands disclosure on these fair values. That’s why these companies are coming out clean today and raising capital because they’re having to write down, where before they didn’t have to do that. So what this is doing is forcing companies to come clean on assets they own that have been formerly stated at original value when, in fact, market value is much less. [37:18]

Hi, this is Brad from Calgary. I’ve got an answer for some of your previous questioner from last week. If you want to find out who sold stuff as ‘anonymous,’ you can call Market Regulation Services in Canada and they will let you know who that anonymous seller was. 2) I looked at the TSX info website and Golden Goliath did not appear to be sold short at all. As of May 31^st, zero shares short. I also seemed to notice that most of the stocks that have a large short interest are dual listed stocks, essentially because there are probably about 10 hedge funds in all Canada. It appears that the Crime of the Century would most likely be Canadian investment banks letting US hedge funds sell the stocks short. So I’m not sure we need to blame the Canadians as being the evil guys.

JIM: Well, Brad, if they are allowing these hedge funds in the US to sell short – in other words, if I’m an investment bank and you’re a hedge fund and you call me up and you say, “Jim, I want to sell ABC company short.” And then I’m going to have to find out, okay, do you have the shares? And then that company is going to have to respond, “well, either I can borrow them from you, or I’m going to make delivery of those shares.” If you don’t make delivery of those shares and you continue to naked short, then what you are doing is aiding and abetting in the crime. And that’s why, for example, Wes Christian, when I was interviewing him last week, is the investment banks are the gatekeepers; if a naked shortseller does not have the shares to deliver, then I have an obligation as an investment bank to say, either produce those shares or go into the market place and buy them, rather than saying, “okay, I know you’re short, but look, you give a lot of business with us, so we’ll allow you to continue this practice.” [39:05]

Hi Jim and John. My name is Roger from Denver. A quick question: you frequently talk about sovereign wealth funds –

JIM: Usually these represent the foreign reserves or the excess reserves by a foreign country, rather than having them be invested by the central bank usually in the securities of other central banks – whether it’s dollar or euros – they’re set up as investment pools to represent the country. And as an investment pool, they’re not going to be investing in securities. They’re going to be looking for assets such as equities that have a higher rate of return, and that’s what a sovereign wealth fund is. [39:49]

JOHN: Let me give you a simple version of that: Sovereign wealth funds are wealth funds that are sovereign. I think that explains it quite nicely, Jim, don’t you?

Hi, Jim and John, this is Jim from New Haven Connecticut. I’m calling because there’s been a lot of talk on your program about the possibility of a crisis in the next couple of years in some financial markets. I’m stuck with a 401(k) that is very narrowly focused. I only have a couple of sectors in it, and I’m kind of wondering where I should stay for capital preservation in the next couple of years if we do get into this crisis. All I have is a choice of some large cap funds, small to mid cap funds, international bond funds and T-bills. That’s it. I can’t get into any of the specific commodities or other types of investments like you’re saying will probably do well, or at least survive if we get into a crisis. So where would you go if you

JIM: Large cap stock funds and international funds. If you listen to the Big Picture where we talked about PIMCO rearranging their asset allocation: 15% US equities, 15% developed country equities, and 15% emerging markets. But you might want to dollar-cost average into that rather than going at once. And I assume if you’re contributing on a monthly basis that’s exactly what you’re doing is you’re dollar-cost averaging. That’s because eventually as inflation lifts off and goes hyper, equity markets will also be going up. [41:17]

Jim and John, this is Bruce from Ohio. This weekend you had a listener who did not buy into the abiotic oil theory. He also had a hard time understanding or believing that oil was generated from decaying fossils. The best explanation of that I have seen was on a special that was put out by the History Channel and the title of it was Crude. It played earlier this year. I have seen repeats of it, but you can also buy the DVD on the www.HistoryChannel.com. An excellent series and it takes you through the process that this earth has gone through in generating the oil from the organic matter. So I would highly recommend this to anyone who is interested in that issue.

JIM: Thanks for bringing that to my attention. I actually saw that on the History Channel. I’m a History Channel buff. I watch documentaries and if they’re good, I’ll actually own them. And thanks for bringing that to our attention – forgot about that one. [42:23]

Hi, Jim and John, this is Emil from Herndon, Virginia, calling to ask if you’ve considered possible collusion amongst some majors and other large gold mining companies and the hedge funds/brokerage firms shorting the Canadian juniors in order to facilitate acquisitions at basement bargain prices. I’d be interested in hearing your

JIM: See, Richard, look what you’ve started.

You know what, Emil, if a major took over a company like a major short position – I’ve heard this speculation given on Minefinders that it’s being suppressed not only by a hedge fund but it’s done as a method prior to a takeover. If it could be proven that there was a linkage in that, I would imagine that there would be a major lawsuit. In other words, if there was a naked short position or a huge, huge short position in the stock and then all of a sudden a major comes in and takes it over, I mean there would be lawsuits all over the place. [43:30]

Hi Jim, this is Mara from North Carolina. I have a question – or I’d your thoughts on true free markets. I’m a former liberal trying to become a libertarian so I’m struggling with some of the questions that would accompany that change. I’d like to think that we could have true free markets in the world that benefited everybody, benefited the owners so that they could be rewarded for their entrepreneurship, benefited the stockholders so they could be rewarded for taking the risk investing in a certain company, and benefiting the workers who produce the services and the products. But I have so many concerns that if you had a true free market it would be the workers who would end up being exploited because we certainly have a history of that: long work weeks, bad wages, bad working conditions, and then the larger issues of pollution and perhaps unsafe products that are foisted on the public. Is it possible to have a true free market where everybody benefits and nobody is exploited. And I wonder if you would comment on that.

JIM: Mara, I’m going to recommend a website to go to, it’s called www.mises.org because there are a lot of articles that you can begin to educate yourself about how free markets truly function. And in order for free markets to truly function, you’ve got to have stability in the currency so that inflation doesn’t go up because inflation harms the wages of workers the most. As we have said so many times on this program, if the real rate of inflation is 10% and you’re in a one-third tax bracket – federal and state – you need to have a 15% pay raise to keep you even. So when you have a stable currency that’s backed by gold, government can’t cheat people by inflating the currency and cheapening it, Wall Street can’t benefit because it gets the money first, after government, by using it to go out and speculate and make money from it – and so in order to do that you’ve got to have a solid, backed currency that is backed by gold and so that you have real, honest money. It’s only when government interferes in the market place by either 1) printing money 2) debasing its currency 3) intervening in the market, whether it’s the Plunge Protection Committee or whether it’s selling off gold reserves to drive down prices, or it’s going in with government statistics and trying to change the way inflation is measured – that’s what really harms people.

Free markets work, they benefit workers. If workers can produce goods at a lower price which was a theory that Henry Ford developed. If he could pay his workers a higher wage, he could produce a product at a lower price, more people would be able to benefit. But you know, that was back when the currency was solid, you didn’t have – the central bank did not have as much power as it has today to debase the currency, nor did the government have the power to do what it does today. Free markets work if they are allowed to work without interference from government. [46:46]

JOHN: I think Mara’s question was valid too, Jim, because if I’m reading what she’s saying correctly here, she was talking about a lot of the problems we had around the turn of the 20^th Century – Remember, child labor in the factories and other such issues. Or the company store where, yes, you worked for a company, they didn’t pay you enough to sort of get off the plantation and get out of that particular business. And then you had to buy everything from the company store. So it was a state of virtual serfdom. And I think that’s to a large degree what she was talking about there, like, can we have a society where that doesn’t happen.

I have to laugh because whenever people talk about exploitation, they’re actually using Marxist rhetoric. And the one thing we do know, is that Marxism and neo-Marxism – and of course, socialism is Marxism light – didn’t work. And the people in Eastern Europe, especially, are moving away from that fast and moving towards a flat tax. Look at what Russia did to get its economy back on its feet after a total decade of just absolute chaos. So the one thing you know doesn’t work is Marxism in all of its forms because it takes away all of the incentives for anybody to do anything in the community or the soviet as they call it, the collective.

And of course you know Jim, the difference between a socialist and a Marxist don’t you? A Marxist is simply a socialist in a hurry with a Kalashnikov. That’s the only difference. Other than that it’s pretty much the same. [48:00]

Hi Jim and John, this is Mark from Spanish Main. I am a real estate investor and over the past seven years we have purchased several smaller single family homes and apartments which I believe will hold its value well as people trend towards downsizing. All of our properties were purchased right, and still have a fair amount of equity even with the downturn. These small homes are already in short supply as only much larger homes were built over the last 10 years. I agree with your theory about a hyperinflationary depression. My question is: how low do you think the real estate market will go before hyperinflation takes over and drives prices up. My thought is if I could hold on to the property I own, at some point I could repay all of my mortgages with hyperinflated dollars and walk away with several properties free and clear. I know that real estate is not your area of expertise but I would like to hear your position about hyperinflation and consumer debt. We have fairly decent reserves invested heavily in energy, agriculture, precious metals – both bullion and paper – and commodities and are trying our

JIM: Mark, I would say you’re pretty well fixed because eventually you will get enough inflation coming into this market place and your mortgages are simply going to be inflated with hyperinflation. So I would say that you know, here in the United States, maybe another 10 to 15% downturn before a hyperinflation starts to raise the value of real estate. If you’ve got good cash flow, you’ve got equity, you’ve got other reserves – keep them, you’re going to benefit. [49:30]

JOHN: That concludes the Q-Lines for today. And concludes the program as well. And we need to look at what we’re doing in the weeks to come. And don’t forget the marine forecast as well.

JIM: Coming up next week, Michael Klare has written a new book called Rising Powers, Shrinking Planet – it’s all about the geopolitics of oil, you won’t want to miss that. On June 29^th, Richard Bitner Greed, Fraud and Ignorance. July 5^th, Marshall Goldman, he’s written a book called the Petrostate. July 12^th, Ronald Wilcox, What Will Happen To Thrift; and a couple of things that we’re going to be working on because the middle of July I will be off on vacation until September. We will be doing shows on Friday except for the last week in August and the first week of September. So a lot of great shows coming up. Some discussion forums. And then remember, Part V, Crime of the Century – our final piece in this series before we go to a written version that I’m working on – that’ll be next week. This is turning into War and Peace, John. [50:36]

JOHN: I can see this black and white trailer from a 1940s type movie Crime of the Century – dun dun, ta dun.

JIM: But you know, the thing about this though, this is fascinating. This almost could be made into a movie. You know, you had one hedge fund manager who was to go to prison for 20 years – I can’t think of the guy’s name – who supposedly wrote a suicide note and is missing now – they haven’t found the body – but he was to begin serving a 20-year sentence for crimes that he committed at his hedge fund. And John, this is just intriguing. I mean I know they’re working – Michael Douglas is currently filming or has probably already filmed Wall Street, the sequel to Wall Street which is coming up, I think it’s going to be later on in the fall. But this is – gosh, this could be a writer – somebody like Tom Clancy picking up on this because the degree of secrecy, intrigue and all of this. I’m really surprised that Hollywood hasn’t picked up on this concept or that in fact, journalists haven’t picked up on it, given probably – and I am not exaggerating, this is probably the largest financial crime ever committed in this nation’s history – that’s how large it is. [51:43]

JOHN: I vote for Charlie Sheen.

JIM: He came clean in the end.

JOHN: And then Don Ameche and Ralph Bellamy for Trading Places.

JIM: That’s required viewing at our firm. Trading Places and also Wall Street. Those are two standard fares. And also I just want to say as we end here a special thanks to Eric King for sitting in and allowing me to have a three day weekend here to visit family because John and I are doing the Big Picture on Thursday to allow me to take Friday off. Also, once again, reminding you that Eric will be joining me again 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.

Financial Sense Newshour

The BIG Picture Transcription

June 14, 2008

Part 1

Part 2

Part 3

Part 1

Commodity Bull Market: Higher Prices Ahead

The Four Phases of Inflation

Part2

Crime of the Century, Part IV: Fingerprints at the Crime Scene, Protecting Mining Companies & Internet Rats

Other Voices: Darin Diehl, Publisher, Executive Editor, Stockgroup.com

Back to the Future: Repeating the Mistakes of History

Q-Calls