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Financial Sense Newshour

The BIG Picture Transcription

July 12, 2008

Part 1

American Blowback: The Chasm Between Washington and Main Street

JOHN: For listeners of Financial Sense Newshour, you know very well that we have covered the topic of energy here on the program ad nauseum and of course, it has become a hot topic. Today we're going to cover the topic from a different angle however, so…stay with us here. As we have pointed out over the many, many programs we have done, and as Matt Simmons so aptly predicted, oil would become the number one topic by this fall's election and it would even displace global warming as an issue. But, our politicians have failed to provide leadership on energy. It's probably more static than anything else, and they are still trying to find a scapegoat during the finger pointing frenzy, when, in reality, the scapegoatee is actually themselves for their own inactions and their failure to address this issue over the years. As a matter of fact, Congress has painted us into this corner.

And what has become apparent on Main Street –despite what anyone else might say – is that the public is really getting fed up with the inaction that is happening and blame game that is out there. It's obvious that higher gasoline, diesel and utility bills are taking a much greater chunk out of the monetary budget of every single household and they are feeling it.

So we're going to start our discussion today with a clip off of YouTube about how the average American feels about this issue.

This is a message for the presidential candidates. It's May 28th, 2008. Call me Joe. I like that because I'm just an average American. Not a politician, not a celebrity, I'm not even in a political party, just a regular American Joe. Now, some might say I'm part of the silent majority. I don't feel like being silent anymore, so listen up Barack, Hillary, John, because this message is for you: What a pathetic disappointment you are.

As senators, you hold some of the most important positions in the entire nation. You should be promoting leadership and ideas for all of our country, not just poor people or business people or those who support your own party. Give us a big vision as a united people and don't keep pandering to segments whose votes you want. Pay attention to all 300 million of us.

Let's look at the situation right now. Most Americans have two huge issues on their minds: Energy costs and the war in Iraq. Higher energy costs are hurting us in our homes and at our businesses. Look, America and the rest of the industrial economies of the world have been built by substituting energy for human labor. We get that. We know that the productive use of energy is now the basic building block of human comfort and success. We need to make certain that American energy supplies and costs are not controlled by others. Do you get that? It doesn't seem so because preaching about what we drive, questioning oil executives and doing nothing about this problem is not an answer. Indeed, all you senators are part of the problem.

Let me explain. Consider a business manager that brings in new inventory each day at the highest cost ever paid, instead of using the 3 to 7 years worth of inventory he already has paid for sitting in the back room. You probably think that manager was making money off of the new purchases or was grossly inept or stunningly stupid. Well, the US brings in about 65% of the oil it uses every day while you senators have about 32 trillion dollars of proven oil inventory we already own on federal land.

And that's about 300,000 dollars worth of crude oil for every household in America. You're our manager, but you're not using it. What should we think of you? Are you making money off of the overseas purchases? Are you grossly inept or are you just stunningly stupid? The importance of inexpensive energy that's environmentally friendly is not news. You three are important politicians, and yet you've done virtually nothing about it in the past and you're doing nothing about it now, not even a plan. Instead, you focus on special treatment for one group or another or preserving an animal habitat. Wake up. What about the national habitat! You say that a far away animal habitat must remain unchanged, but it's just fine if the habitat of the average American declines. Now, you can probably afford to be strident about some herd a thousand miles away. Most senators like you have millions of dollars and everything your families can want, insurance, college educations for the kids and fat pensions that we fund. Meanwhile, you block the use of our nation's oil assets worth trillions of dollars and force us to send both our treasure and our young soldiers to our enemies. What is wrong with you? You're all pathetic panderers to race, gender and special interests while the major problems of our 300 million people are almost ignored.

Well, we regular Joes are going to try to help you out here, so here is a big plan for you to consider since you offered so little to consider yourselves. The key here is to think about using our own oil reserves as a means to get us off of imported oil. It has four steps.

One, put a national energy plan in place. [5:47]

JOHN: Actually, I found that quite insightful, Jim. He runs on for quite a few more minutes, but we didn't want to run the whole clip here on the program, but he basically has the problem. He has the problem, he has the solution, he knows which direction we should be going. He, as Joe American, seems to understand that we're stalling out here due to all of the congressional posturing.

JIM: You know what is amazing because a lot of the newscasts have been talking about – and especially when we had the hearings on Capitol Hill last week regarding speculators, and one of the comments that Brit Hume made was that the only people that don't understand supply and demand are people in Washington. But anyway, getting back to this audio clip that we heard from this one gentleman –a position that we've always stated here on the program – was that it was going to take a crisis before the American public would wake up from its lethargy and demand action.

And what I find amazing as the price of energy goes higher – now, remember on the day you and I are talking on this Friday, oil prices hit almost $147 intra day, but support for drilling is now close to 80%. And I predict that figure is even going to get larger as the price of oil and gasoline head higher. You know, think what people are going to say when oil is at $200, 250 a barrel and gasoline prices are at 6 and $7 a gallon. [7:09]

JOHN: I could say I still find it remarkable that instead of coming up with a comprehensive plan –although, in all honesty, deep down in my heart, Jim, I don't find it remarkable because of the way politicians behave but nevertheless, Congress is still fiddling around. In fact, as a matter of fact, if you look at some of the weirder stuff that's come down over the last few weeks, we have had proposals for cap and trade which originally was designed to reduce global warming by reducing the amount of energy by making energy more expensive. That was the goal. So you actually have –in the midst of an energy crisis – Congress putting through legislation designed to make energy more expensive at a time when everyone is complaining that it's more expensive. So it is already doing by de facto what they wanted to do by cap and trade. You didn't need it anymore. And by the way, that would have raised the cost of fuel from utilities to gasoline about 40%, I think is the estimate of what that would have done.

In fact, there is talk by Senator Obama and other members of Congress about cutting imports from Canada's tar sands because it is referred to as dirty oil. And I think the restriction in one of the most recent bills is that the US military could not use Canadian tar sands oil. Now, here you are in the middle of a war situation, and they want to cut that back. None of this makes any sense, Jim.

JIM: No. In fact, what you're referring to, John, there is a provision in a bill that forbids the Pentagon from buying petroleum products from Canadian oil sands. In fact, in a speech at a mayor's conference in Miami, Obama vowed to get the nation off dirty oil – a reference to dirty oil would either be shale, or a direct reference to the tar sands. In fact, one of the reporters confirmed with his staff that he was speaking about Canada's oil sands. And you know, if you put this in perspective, Canada is our number one exporter of oil to the United States. We import oil from about 16 countries. At the top of the list is Canada. We import over two and a half million barrels a day, and a good portion of that, John, comes from the oil sands. So if we lose Mexico, which is our third supplier due to declining output, and we stop imports from Canada's oil sands, we're going to lose almost a third of our imports.

And let me tell you that those exports from the oil sands aren't going away. If we don't take them, they are going to go to China or India, so the fact that we're sitting here today talking about oil prices that are close to $145 a barrel, I'm absolutely amazed at our own stupidity. If we lose Canada and Mexico as a supplier, this makes us more dependent on Middle Eastern oil – not a very bright idea in my opinion. [9:52]

JOHN: Yeah. But if you look at the radar screen right now of what politicians are talking about, the fact that Mexico is going to drop off the radar, so to speak, is still not penetrating the consciousness of Congress people. They are acting as if it's still going to be there. That's the most important part. I'd like to play a commercial here. It’a a commercial ad that's been playing on the cable TV networks and it is by famed oil man T. Boone Pickens. He is trying to address this situation.

Did you know back in 1970 we imported 24% of our oil and by 1990 it was 42%. Today it's almost 70% and climbing every minute. Over 700 billion dollars are leaving this country to foreign nations every year. That's four times the cost of the Iraqi war, and it's killing our economy. It will be the largest transfer of wealth in the history of mankind. We don't need any more talk. We need action and we need a plan, and it's got to be the top priority of the next president and the next Congress. I'm T. Boone Pickens. I've been an oil man my whole life, but this is one emergency we can't drill our way out of. And I have a plan. In the coming weeks I'm going to share the details of that plan to use American technology and alternative energy to slash our dependency, and break foreign oil's strangle hold on us. It's our crisis and we can solve it. [11:15]

JIM: There it is, John. Plain, simple, straight forward. I couldn't have explained the problem any better. But, you know, more importantly, here is a gentleman that has a plan; something our Congress and probably every American president in the last three decades has failed to achieve. And you would think – this is the most surprising thing with oil prices up 15 fold since 1998 – that's when oil got down to about $10 a barrel, up seven fold in this decade – our political leaders would be taking this issue seriously. And remember, up until I guess probably it wasn't until oil crossed $125 a barrel that they began even talking about this issue, and especially when gasoline prices went over $4 a gallon.

Instead, the only thing that leaders in both parties are doing are absolutely nothing other than political posturing. And John, I want to cover just a few headlines from just this week. This was on Wednesday. The government reported inventories failed by almost 5 million barrels, and on Thursday when oil jumped nearly five or six dollars a barrel, there were four stories that came out that day. I just want to go through them. On Thursday, Iran test fired more missiles in the Persian gulf; the Nigerian militants, MEND, ended their cease fire and said they'll begin attacking oil installations (and why that's very important is Nigerian oil is light sweet crude, it is the preferred oil for most refineries in the United States); thirdly, Israel responded to Iranian aggression by stating that they are ready to attack Iran; and at the same time, 4), the International Energy Agency issued a new update on world demand for oil increasing daily demand by 80,000 barrels a day to 86,850,000 barrels, based on increasing energy demand from emerging nations. In OPEC, spare capacity right now is razor thin.

So if you take a tight supply, demand imbalance as we have today, throw in geopolitical tensions –and by the way on Friday, there was a story in one of the Israeli papers that their air force has been flying practice bombing runs in Iraq, which everybody is denying – and throw in actions by the world's largest consumer, the US, it's no wonder we're seeing record headlines in the price of oil. And if you take all of this, add it up together, I believe now we can see oil prices spike even higher because we're dealing with tight supplies, increasing demand, mounting geopolitical tensions. And Nigerian oil, which is light sweet crude is in scarce supply. It's preferred over the heavy sour crude oil, and now we have the rebels pledging their renewal of attacks on Nigerian oil platforms, more aggression by Iran, which could spark a whole series of new record highs in oil. And that's why I think it's very important because part of the markets operate on psychology, so when you have a tight market as we have today, any time you get any kind of news like this, you know, what happens? Three or four days ago, we were looking at oil prices at close to 130; here we are today on Friday intraday and we hit prices close to 147. So in order to counteract the fear in the market, one thing that leadership could do is come up with a plan and say “we're going to start taking actions, here is what we're going to do to overcome our dependency on all of this oil as the world's largest consumer; and we're going to begin these steps immediately, step one, two, three, four, five.” But instead, John, this is an election year. We have no plan. [15:16]

JOHN: I want to get back to the Boone Pickens plan as a matter of fact. Now, here, Jim, you've got an oil man who spent 60 years in the oil business. He said we can't drill our way out of this mess. That's something you've been hearing certain politicians say, but we do need to start now an attack on the problem using everything from drilling to alternatives. It's like sort of a multiple choice question on an exam and as long as you phrase it as either this or this or that or that this, you'll never get to the bottom. So let me give you an example right here. To solve our energy problem, we need to do the following: a) conserve energy; b) drill our own oil and gas; c) expand R&D spending on energy technologies; d) expand all use of alternatives. Now, up to this point, Jim, all of those four points have been discussed as either a or b or c or d, when in reality the answer is, e) all of the above – which is what Boone Pickens is trying to say.

JIM: Yeah. He's absolutely right. Different in the 19th century when people were lighting their homes at night with whale oil, then we went to coal and then we discovered rock oil or petroleum. When it comes to energy, there is no silver bullet when it comes to energy right now. So that is why as you just made reference to, we need to be doing everything we can from conservation because that helps us immediately and that's starting to take place. As the market raises the price of gasoline, American consumers are starting to cut back –and consumers around the globe.

But also, we need to begin drilling in our own backyard for oil and gas. We need to be expanding renewable energy, and just as Pickens has stated in his commercial, he believes –and I personally believe him when he says that – renewables can provide about 20 to 25% of our future energy needs by the year 2020. If you listen to what he's saying here, we can cut our imports by almost 40% in less than 10 years. And what he's proposing here is using wind to replace natural gas because a lot of the new peak power plants that are coming on for electricity are powered by natural gas. What he's saying, let's take natural gas away from using it for electricity. Then divert that domestic natural gas into liquid fuels for transportation. This will save the country close to four trillion dollars over the next 10 years. And John, even the Sierra club is backing the Pickens plan. [17:51]

JOHN: Interesting. Let's play an updated video. Actually, the audio from a video from the Boone Pickens site as he explains how exactly what you're describing works.

I want to talk to you about a huge problem that this country has. In 1970, we were importing 24% of our oil from foreign countries. By 1990, we were importing 42%. It’s getting worse fast. Now, we're 2008 and we are importing almost 70%. The cost is $700 billion. We've got to do something about the 700 billion because just multiply that times 10, and that's 7 trillion dollars. We can't afford it. Out of 1000 people in America today, 750 of them have cars. In China, 44 people out of 1000 have cars. Out of 85 million barrels, every day in the world, we are using 21 million of that. That's 25% of this oil, and we have 4% of the people. That's a problem. What are the resources we have to work with? We've got coal, we've got natural gas, we’ve got hydro, bio, wind, solar and you have nuclear.

Nuclear is going to be used but not for this illustration because it's going to take us too long to get nuclear up and going, so when you go back over the list, which ones will help us with the 700 billion? Natural gas will do the job. It is the second largest natural resource in the country. There are eight million cars in the world today, cars, buses, trucks that are on natural gas. It's a good transportation fuel. It's cleaner, it's cheaper and it's domestic. When you look at the power generation pie, 50% is coal, 20% nuke, 22% natural gas. This is the one I want to go work on.

Let me show you a map. When you look at it, the red is the better wind, and you can see here in the United States compared to the rest of the world, for land size and everything, we're the best. We have more wind than anybody else does. We're not using it. The red being the primary wind area and it's good; isn't it? It looks nice. It's a huge resource located perfectly in this country in the center of the country, it's safe and it can be transmitted both east and west. Now, there is a model town. It's Sweetwater, Texas. It was a town that looks a lot like rural America where it's gone downhill. Now, because of wind, it's a booming community. They have 2000 megawatts of wind at Sweetwater. We're building a big wind farm here at Pampas, Texas, which will be the largest in the world, it’s 4000 megawatts. The government has done a very good study on it. It shows transmission for 20% of electricity from wind.

That's what I want you to focus on is the 20% that we can do from wind. Let's give wind just a little bit more. So we're going to do power generation with 22%. That fits this number here and you take the natural gas out and it goes to transportation fuel. It would reduce imports by 38%. What would that do in dollars? It would be about 300 billion dollars. So we could cut this down by 300 billion by merely doing 20% -- 22% wind and take out 22% natural gas and put it over here to transportation. This can all be accomplished in less than 10 years if you have the right leadership. And that's the key to it.

We have to have the right leadership and everybody in this country has to cooperate. We have to get on the same team, we have to March in the same direction, but we all know that we are going to get loosed from this right here, but that is a stranglehold on our country that we can't – we can't live with. It's that simple. Thank you. [22:28]

JOHN: Was all that wind he was talking about along the Potomac or was it out in Texas on the Great Plains?

JIM: Well, anyway, John, you know, a lot of our listeners have probably seen his commercials on the cable channels. In fact, he's spending 50 million of his own money just to promote the idea with the backing of environmental groups. In fact, on the Pickens website, www.Pickensplan.com, these are the words from Carl Pope who is executive director of the Sierra Club. He said to put it plainly, T. Boone Pickens is out to save America. But you know, at the end, though, he said one key thing and that is ‘leadership.’ And right now, John, we don't have any leadership. Congress instead is looking for scapegoats or we get this political posturing and this goes against both parties. The Republicans want – the only thing they want to do is drill; and the Democrats have become the CAVE party, which is “citizens against virtually everything.” And I think what Pickens is saying here is what is needed here is bipartisan leadership that works on all of these alternatives. Go back to that test question you gave, which is we need to be doing all of the above. We need to drill. We need conservation. We need to develop technology. We need to look at alternatives. And more importantly, John, we need to do this now.

As he has pointed out, we've gone from 25% imports from 42% to 70% imports and that is growing by the day. And this is something that the longer that we postpone taking action and putting together a comprehensive plan the worse this crisis is going to be and that's why as we have been mentioning – a while back we interviewed one of the engineers at Toyota on the Prius – and we're telling people get yourself a fuel-efficient car, at least have one fuel-efficient car because at the present rate in terms of where we're going, the tight supplies, the growing demand and the geopolitical tensions and disruptions, supply is so tight, John, that I believe that we're not that far away from rationing. [24:44]

JOHN: Yeah. If you look at where we are right now, if you look at the chances of politicians doing anything – at least this year because this is an election year and the goal here is to keep your constituent group sort of marching with you so they reelect you, but the problem is –as we've always said when you go through a paradigm change and that's what we are in right now as far as the energy situation is – everybody keeps acting like it's the good old days, and so they keep dealing with the new situation based on the old rules and that simply is not going to work.

As you've always said, it's going to take really a full blown crisis, probably I would say before they do anything; and what that ultimately means is until the crisis hits, or as part of the crisis that means higher oil prices, higher gasoline, heating oil prices for all Americans all around; and that's going to just drive the price of everything else up, so we're forcing this crisis upwards.

JIM: And this goes back to something we were talking about earlier in the oil markets. It's psychological. When you see things, for example, as we did on Friday and on Thursday with Iran firing missiles, Israel threatening to attack Iran in response, Nigerian rebels saying they are going to attack the oil platforms or the International Energy Agency reporting demand is growing for oil, you see oil prices rise by $5.60 in a single day. That was Thursday.

If the US would come together and announce and pass quickly a comprehensive energy plan –you remember, John, back in February when they passed a stimulus plan from proposal to the President signing, they did that in 30 days, you can do the same thing on energy. But once again, we get back to this is an election year, and so in an election year, there is no way you're going to get parties to cooperate with each other, because everybody is trying to get into their battle mode and say what can we do to make the other party look bad and win seats for our party. So it's unlikely that you're going to see any branch of government cooperate this year. So that means oil prices are heading higher as they are doing on this Friday.

We've got currently oil prices up about two and a half dollars and a little over $144 a barrel, and that means as oil prices head higher, so are gasoline prices. And not just here in the US, but around the globe. And as energy prices head higher, so will food prices – and that's another thing that politicians don't understand: Energy and food prices are tied at the hip. Energy is used to create fertilizer. It is used to power tractors and combines. It's used to transport food to either a processing plant or it's used to process or transfer processed food to the stores. Then consumers use energy again to get to the stores. So the higher energy prices go, the higher food prices will rise along with higher oil prices. [27:44]

JOHN: And I think if you look at whole situation, Jim, it's not that we don't have a problem. We do. It's not that we don't know what solution of the problem is. We do. It's getting everybody as Boone Pickens remember said, “we've all got to march in the same direction.” It's getting this squabbling mass of politicians in Washington to march in the same direction, so I'm optimistic of what we could be doing, but is there any hope that that is going to.

JIM: I don't think so, John. Not in the short run. I mean if Americans want to know why they are paying high prices at the pump, or foreigners want to know why oil prices are rising around the globe – I mean if you think we're complaining here at 4 dollars, I've heard stories that in Europe you can be paying 10, 11 dollars for diesel fuel – but if you want to know why oil prices are heading higher, it's a do-nothing Congress. The US Congress has done nothing for over three decades despite a 14-fold increase in energy prices since 1998, and almost a 7-fold increase at the beginning of this decade.

And what I want to do now, I want to read a post that was published by the senior investment strategist Michael Zimbalist [phon.] at JP Morgan Chase, and he wrote this on July 7th and it begins:

1776, I've come to the conclusion that one useless man is a disgrace, two are a law firm and three are called the Congress. So said John Adams on US independence.

And he goes on, he goes:

The same applies to energy independence in 2008 as the US endures an energy crisis and imports 70% of its energy needs, the house and the Senate have decided to take action. They overwhelmingly voted to allow OPEC to be sued in US courts for running a cartel. The mind reels over the last 30 years, US elected officials blocked nuclear build out and spent fuel storage construction, impeded construction of oil refineries, refrained from passing meaningful alternative legislation, imposed an import tax on cheaper Brazilian ethanol, prevented offshore drilling in Alaska, California and Florida, delayed for 30 years tighter CAFE auto efficiency standards, blocked the construction of LNG plants, killed wind farms in their own backyards and neglected opportunities for public private sector partnerships on energy R&D. We got it wrong. Congress should sue itself instead.

Instead of ineffectual and counter productive OPEC lawsuits, look at what other countries are doing. Germany has reached 14% renewable electricity use and Denmark is already at 40%. Check out the attached insolation map. Except for Seattle, the entire continental US is much sunnier than Germany, yet Germany has 17 times the installed solar base per capita. Same goes for Japan where they have feed-in tariffs and have finally ended that.

And then he goes on:

The solar business is thriving and competitive. The head of the US government's renewable energy lab says that the federal government is doing embarrassingly few things to foster renewable energy. Renewable energy research has fallen by 78% since 1978 and the lab's budget is a paltry 200 million. This despite the fact that a handful of successful Department of Energy R&D projects yielded benefits that exceeded the total cost of the entire energy R&D program. The just-rely-on-the-private-sector solution isn't sufficient, particularly when the intellectual property rights aren't long enough for energy related investments.

A national task force recommended in 2006 that the federal government fund demonstration projects to provide proof of the concept for carbon-capture storage and other complex technologies, but it's not happening on any grand scale. Meanwhile, China signs oil and gas supply deals with Venezuela, Indonesia, Kazakhstan, Iran, Saudi Arabia, Brazil, Gabon, Russia, Ecuador, Myanmar, Turkmenistan, and Australia, and is not wasting much time applying Chinese antitrust laws to OPEC. The world is changing much faster than the ability of the US legislature to comprehend it. The bill’s misplaced sense of entitlement is matched only by its pandering delusion.

And once again, that was a missive coming from Michael Cymbalist, Chief Investment Strategist at JP Morgan Chase.

JOHN: Well, I'm afraid I tend to agree with you at this stage of the game. Let's face it. This is an election year. They are more likely to stick with their do-nothing strategy in order to posture for electioneering purposes, so that means right now higher prices for energy for all Americans because nothing is changing here. By the way, if anyone else wants to find out about T. Boone Pickens plan, you can go to his website at www.pickensplan.com.

And speaking of websites, you're listening to the Financial Sense Newshour at www.financialsense.com.

Overboard

JOHN: Well, let us go into the rules of paradigm shifts because we're passing through a number of paradigm shifts right now. Rule number one is that historically when a society has passed through a paradigm shift (meaning a radical change in the way reality is perceived and acted upon) most of the public does not recognize that they are in a paradigm shift. Because of that there are several things which happen. Number one, they tend to try to think that whatever is changing is only a temporary change, and if we just work at it long enough, we can get right back to where we were before, get back to normal and get back to the way things were, sort of oil back at 250 a barrel.

Number two, if they do get around to the point of realizing, okay, things have changed but they are not going back but we need to deal with this, they will try to deal with it using the rules from the old paradigm. And only finally, when you get to number three, do you recognize that a) we're not going back and b) the rules have all changed. And those are typically chaotic periods, Jim, in the history of mankind.

But it's funny. When people go through that in their personal lives or whether societies go through it, those tend to be the steps. It's almost like Elizabeth Kubler Ross’ On Death and Dying. Do you remember that? The stages of denial and things like that.

JIM: Sure. I think also too for so much of the 20th Century, the US both economically and militarily has dominated the world and especially from an economic view point; and especially with the fall of the Soviet Union back in 1990, the US was looked upon as the world's sole super power and an economic super power. Here we are, John, on a Friday. You’ve got the Secretary of the Treasury Paulson talking about the government supports Fannie Mae and Freddy Mac and you're talking about the meltdown of the largest mortgage pool. I mean Fannie and Freddie stand behind 5 trillion dollars of mortgage debt and there is talk about there may have to be some kind of bail out; and we just don't know where this bail out is going to go.

And unlike previous crises as we have talked about here on the program – I mean any time there was a crisis around the world in the 80s and the 90s, the US would come to the rescue, and the crisis was always somewhere else. Now, we're the epicenter of the storm and here we are, this week, talking about: will Lehman be the next major investment bank to go? And the two largest quasi-government-agency companies that are behind the mortgage market, Fannie and Freddie, John, are seeing their stock down in 25% in a single day. If you want to look at the two largest mortgage entities in the United States Fannie Mae and Freddie Mac – any idea, John, how much their stock is down this year?

JOHN: No. I haven't checked it.

JIM: Fannie Mae is down 75% year to date, and Freddie Mac is down 78%. And if you look at just the last week alone, Fannie Mae is down nearly 50%, Freddie Mac is down nearly 52%, so here we are this illusion that the US is the world's loan super power is quickly fading.

And if you take a look at the economic growth in this decade, yes, the US economy grew at about a 2 or 3% rate and a subpar rate compared to the previous decade. But the engine of growth, most of the growth globally has come from these emerging markets, and how ironic if you go back 10 years ago, when we were facing crises –with Russia’s debt default; in 97, the Asian crisis – a lot of these emerging countries have now become creditor nations to the United States. Talk about a complete about-face of what has gone on economically. And that's why I think this is very important that this paradigm shift, a lot of people are taking a look at the old rules and assuming that the old economic models, the business cycle would operate the same way: The Fed would raise interest rates, slow down the economy, inflation would go away. That didn't happen; or the Fed would raise interest rates and long term bond rates would go up – that didn't happen.

Or, when the Fed cut interest rates as it did after 9/11 and recession of 2001, you had for the first time all asset classes going up at the same time. Bonds were going up in value, stocks were going up in value, and commodities were going up in value. So a lot of these old paradigms are changing, and that's why we have talked over the last couple of weeks –whether it was the folks over at PIMCO, El-Erian talking about in his new book When Markets Collide – we are witnessing here in real time a major paradigm shift in terms of how the world works, how the financial markets work and even how central bankers work. [38:53]

JOHN: In what way has it changed because basically you have to recognize what the changes are, Jim, if you're going to begin to respond to them in a new way?

JIM: Well, number one, the US, which was looked upon as a safe haven for capital is no longer looked upon in the same way. I mean the crisis, the epicenter is here in the United States. I mean just take a look at once again our two largest mortgage lending institutions Fannie and Freddie, you had a Fed governor saying that they are facing insolvency. You're looking at our large money center banks and investment banks, the power houses, having to go begging for capital around the world; and look at the main writeoffs where you're talking about the Fed loaning out half its balance sheet to institutions to keep them solvent. Had the Fed not done that –and we'll get into this in the second hour, John – basically our entire banking system would be considered insolvent right now. And so that's why, I think you have to recognize: This is not your ordinary crisis.

And this gets back to something that we've been talking on the program that we're heading into a crisis window here and it's accelerating at a much faster pace than even I originally anticipated at the beginning of the year when we talked about the Oreo, the hard outer shell; and it looks like right now we're going right into that hard outer shell and then into the crisis window. I mean if you look at value of the US dollar, which hit a peak back in 2001 in the summer at 120, John, it's dropped down to 72. The dollar has lost 40% of its value, and people are looking at this and saying what is holding it up? And that's why I think you have a bailout coming to the American taxpayer and in the end is going to end up bailing Fannie and Freddie.

And you remember the mortgage program, the $300 billion bailout program that they were working on, they are looking for Freddie and Fannie to go out and make these loans, they are reducing Fannie and Freddie's capital requirements. Earlier they extended the limits of which Fannie and Freddie could get involved in. In other words, they upped the limits to I think it was over 700,000, so they could get in the jumbo home lending market; and here we are looking at these two federal institutions where a couple of years ago they were trying to rein them in. Now they are trying to expand their lending activity at a time virtually they are losing so much money that their equity capital is eroding by the day and may require vast injections of new capital either coming from the private sector –I think that's what they are hoping – and if it doesn't come from the private sector, you're talking about the government stepping up. [41:42]

JOHN: You know, maybe I should have added another thing in the paradigm shift list of what happens, but when we get to the last stage, stage number three, typically only a few, what do you call them, visionaries at any one point actually seem to grapple with what's going on. For example, I think T. Boone Pickens does. Marc Faber is another I would put into that category. They actually see the overall picture rather than just a side slice.

JIM: Yeah. In fact, in his latest Gloom, Boom And Doom Report, this is the July issue, Marc writes –and I'm quoting here from Faber's newsletter – he says:

When the world changes, old rules and models have to be thrown overboard. This is the greatest challenge in the investment game because once in a while, the invisible hand changes radically the rules of the game. However, unaware of these changes, the market participants, the strategists, the media and government agencies continue to play, follow and implement policies dictated by the old rules.

This is, once again, John, getting back to what you said earlier: Everybody thinks this is a hiccup and we'll go back to normal. Now, Faber goes on:

I have witnessed major rule changes several times in my life as an investment observer. In the early 1970s, nobody would have envisioned that commodity prices would soar and that bond yields would rise from 6% in 1970 to more than 15% in 1981. In the early 1980s, no one foresaw that consumer price increases would decelerate and that bond yields would decline to slightly over 3% in 2003.

Let me just stop there because a lot of people are saying now that we are now going to see that climb – I call it climbing the mountain – where you're going to see bond yields rise over the next couple of years as the bond market gets wind that inflation is here to stay, and in fact rising.

So Faber goes on:

In 1989, no one expected that the Japanese market, which at the time made up more than 50% of the global stock market capitalization, would be down by 60% from its high almost 20 years later. And around the turn of the millennium, investors and strategists, who were led by the erroneous economic theories of the leaders of the goldilocks cult failed to understand that the TMT – that's the technology, media and telecom sector – was doomed, but that commodity prices were in real terms at their lowest level in the history of capitalism at a time when countries like China and India were beginning to grow very rapidly. What has happened since then, readers of this report know all too well. But there is a body out there, including the Federal Reserve, that does not understand the changes that have occurred in the rules of the economic and financial game over the last seven years. In particular, what strikes me is that some experts and government officials blame speculators for the sharp rise in commodity prices.

So once again, what Faber is referring to is every decade or so, there is a major paradigm shift whether it was stocks in 1966 moving to commodities in the 70s, Japanese stocks peaking in 1989, and tech stocks peaking in 1999 and early 2000; and then all of a sudden there is this paradigm shift that takes place, you know, everybody is looking back and saying, “No, this is unusual, things will resort to normal conditions. This is just a blip, and we'll go back to normal.”

And John, that's why, as we've been saying on this program for seven years when oil was at 20, it was going higher, when it was at 40, it was going higher and each step along the way we hear all kinds of reasons – and this comes from the old paradigm, why oil prices shouldn't be at 40, 50, 60, 70, 100, 125, 145 – and we hear the old rules, people come out and say, “no, this is not normal, we're going back to the old way.” It just doesn't stand up. [45:57]

JOHN: Well, let's look at it this way, now. If we are facing new rules, first of all, government doesn't respond until people pressure it to do so. It tends to stay stuck in its own ways. That is a core trait of bureaucracies, so it would seem that people are going to have to figure out themselves what is going on and take whatever steps they need in their personal lives, investments, everything related to that.

JIM: Yeah. And I think what is very hard for the United States is the United States used to be the super power of energy. We were the world's largest producer of energy up until 1970. In fact, 1970, the year that our oil production peaked, John, we were producing 10 million barrels a day equivalent to what Saudi Arabia produced at Saudi Arabia's peak production. And for so long, energy was cheap here and now there is a major shift in economic power as T. Boone Pickens made reference to in our last segment; we are transferring 700 billion dollars a year out of this country to oil producing nations. And John, as we have said here and as Pickens has highlighted in his video, that is the largest transference of wealth in the history of the world. And that is continuing. [47:13]

JOHN: You know, you can see everything you're talking about if we just take a look at the world markets out there. Here in the United States, the Dow Jones is down 16.5% since the beginning of the year. The European markets in the same timeframe, 27% down; the Japanese Nikkei, 15 – about what US is; but China is down a whopping 46%. Now, that is the stock market. How do these factor in terms of the commodities?

JIM: Despite last year, oil prices having gone from 50 dollars a barrel all of the way up to 95, this year alone, West Texas Intermediate crude prices are up 50%’ Brent crude is up 54%; we're looking at natural gas prices are up 63%; coal prices up 51; steam coal up 72.

Now, we get to precious metals: gold prices are up 15%; silver prices are up 24%; platinum is up 34%. You get to base metals and that this week, Alcoa reported record earnings: aluminum is up 33%; copper is up 27%; tin is up 41%.

And then you get to the agricultural and soft prices: ethanol up 38%, corn prices up 48%, soybean prices up 36%, sugar prices up 18%. And it's not just this year. If you look at this decade, gold has gone from 250 an ounce roughly to $963 an ounce, and as high as over $1000 an ounce. Silver has gone from a little over $3 an ounce to this Friday we're seeing silver prices at almost $19 an ounce. Oil, in this decade has gone from 20 to 145. Grain prices have doubled and quadrupled. The CRB Index went from a low of 183 back in October of 2001 (it hit a low right after the events of 9/11). On this Friday it is at record territory, close to record territory at 460. It hit a high of 473 on July 2nd of this year. So you compare those kind of returns – the HUI index (which represents the largest cap producers that are unhedged) has gone from a low of a roughly 42 back in 2001 to a high recently of 514. That was reached in March this year. On this Friday, the index is up 20 points at 452, so you're almost talking about an a ten-fold increase in the gold stock index.

And it's amazing – the only thing you hear almost weekly in the media is “have financials bottomed and is the commodity bubble getting ready to burst?” Despite the fact that we're looking at double-digit losses from the major indexes compared to double-digit gains for major commodities. [50:22]

JOHN: It's really sobering when you think about the fact when you hear the largest manager of bonds and probably some of the world's largest investors all talking about the return of inflation. Okay. It's here. It's no longer this matter of speculation like we were doing over the past few years. It's here. You'd better change your strategy because we have shifted again, and following the old strategies are going to bring you nothing but disaster.

JIM: Yeah. And I think another important thing – and this gets back to the dollar – with the dollar losing 40% of its purchasing power and the US financial sector becoming insolvent –and we'll get into the next hour – the implications of the Fed loaning out half its balance sheet to troubled financial institutions, but what we're witnessing in real time is the dollar is slowly losing its status as the world's reserve currency as other foreign central banks and financial institutions begin to shift assets out of the dollar, and eventually into gold and hard assets.

And at a time when the credit bubble is bursting, if people are upset about $4 gasoline, what are they going to do when gasoline goes to 6, 7 and 9 dollars a gallon here in the United States; and it's already heading towards double-digit territory over in Europe. By this time next summer, John, we're going to be looking at 6 and 7 dollar gasoline. And who knows, when we're going to hit $200 in oil, $250 in oil, or when bullion prices on gold go past a thousand and stay there and go to 1200, 1500, 2000, 2500. And we're looking at major, major losses.

And I think what you're seeing here is a growing recognition globally is the US is no longer considered a safe haven of capital. And once again gold is resuming its historical role as real money because gold is going up against all of the major currencies in the globe; against the dollar, against the euro, against the yen, against the loonie, against the Australian dollar, against all major currencies. And it really becomes significant when the Fed has taken half of its balance sheet and treasuries, loaned it to financial institutions, in exchange taking that toxic debt on the its balance sheet.

And it was amazing, if you listened to the testimony, both by Paulson and Bernanke on Capitol Hill – let's go to that clip where the one congressman said “where are we going with this?” In other words, once you loan out all of your treasuries, is the next step monetization? [53:08]

JOHN: And the congressman is Congressman Scott Garrett. He's a Republican from New Jersey.

GARRETT: It appears to me that if one of these highly interconnected investment banks were to fail in the near future, and with the Fed’s balance sheet then has limited or no room left on it, coupled with there being no legislative frame work in place going into this, would the Fed, in essence, have to monetize the situation to bail them out: Would the Fed have to deal with new treasury paper to bail out the bond holders, which is what you really – occurred with the Bear Stearns situation if another situation came?

So my questions are to you is three. Can you assure us, and I think I know the answer to this question, but can you assure us that you will not conduct any similar Bear Stearns transaction if another investment bank or a GSE gets in trouble without the prior explicit authorization from Congress via some sort of enabling legislation?

Two, if you decide that there is no alternative than to conduct another bailout or support, however you want to call it, to one of these troubled organizations, will you be willing to monetize the debt to finance such a transaction due to the current limitations on your balance sheet? And thirdly, your claim that your actions with the Bear Stearns transactions are granted to you under section 13 of the Federal Reserve act. Are there any limitations within that section or elsewhere as to your abilities – subject, going forward, to deal with these situations?

BERNANKE: Well, to try to address those range of questions. Over the weekend when we were working on the Bear Stearns issue, I was in touch with Congressional leaders, kept them informed and I – the sense I got was that there was not an objection to pursuing it. I also, of course, worked very closely with the Treasury and with the SEC and other authorities to develop a consensus for the actions we took. And as I argued before, I think they were – they were necessary.

So I, you know, I don't want to make any commitments. I don't think a situation like this is at all likely. But unless I hear from Congress, then I should not be responding to a crisis situation. I think that it’s a long standing role of the central bank to use its lender of last resort facilities to address –

GARRETT: So the first answer is ‘yes,’ so the second question, then, is would you potentially monetize the situation of the balance sheet.

BERNANKE: No monetization. This is a sterilized operation. There is no effect on the money supply. And in addition, I would add that our lending – not only to the Bear Stearns issue, but to the – but more generally to the banks and so on – is not only collateralized with good haircuts, it's also recourse to the banks themselves. We have not lost a penny on any of this lending, and it is just lending. We're not purchasing any of it. It goes back to the bank when the term of the loan is over.

JOHN: You know, what we were saying, while Ben was talking there, was: blah, blah, blah, blah. You could hear him trying to talk his way around that situation, but it was a very limp answer to a very important question. [55:57]

JIM: Yeah. And I think what he was saying is, “look, there is probably more financial crises coming here, and because of that, one, are you going to clear it through Congress? Second, what happens when you loan out all of your securities…” And you have to understand, one of the reasons –and I'll give you an example here – that they are doing this is, let's say, I'm a bank and I have 20 billion dollars of equity. Now, let's suppose I have a hundred billion dollars in mortgage debt, collateralized debt obligation, the toxic waste that everybody has been talking about. If the value of that debt drops from 100 billion down to 80 billion, my entire equity at the bank is wiped out. So the reason that the Fed is loaning out its treasury securities to these financial institutions and taking this toxic debt on to its balance sheets, it's because it would wipe out the debt of these financial institutions and render them insolvent. So we were seeing the stocks down almost 25% today and now we're starting to see a rally in those stocks. They’re only down about 2%. So we're gaining some of the ground in the Dow Jones Industrial Average. [57:13]

[Music: Ride of the Valkyries]

JOHN: I hear the sound of black helicopters loaded with money coming across the horizon. It seems the president has issued an order to Ben Bernanke, rev up the helicopters, dump the dough. And as the Ride of the Valkyries goes out in the distance, what am I doing, oh, yes, we're at www.financialsense.com. More to come. Listen to that sound.

Part 2

The Fork in the Road

JOHN: Well, there comes that time when every civilization either politically or economically or – I guess even from worldview points of view – has to make some decisions. You come to a fork in the road and it’s interesting, there’s always the analogy of the two streams that run close to each other near the Continental Divide and they start within just a very close distance to each other – within eye-shot – and yet one of them will run into the Atlantic Ocean and the other will run into the Pacific. And there’s that critical decision: which way are you going to go? But once you set your foot on that road – and that’s where we are right now economically here in this country – the results will be far different depending on which way you went.

JIM: And the road that we’re facing, John, is we’re at a point in history where either we’re going to put our financial house in order, or, we’re going to end up in terms of massively inflating our way out of it. And as we have pointed out – and, gosh, we’ve been doing this in a couple of programs, When Money Dies, Dying of Money, we did recently – and that is: Once you get on the inflation bandwagon, it’s hard to get off it once it begins. And right now there is a 300 billion dollar bailout package before Congress again. And it was amazing because only 22% of Americans approve of it; never mind that Congress is not paying attention to that, it has powerful constituents who contribute to their campaign. But once you start bailing out the bankers, once you start bailing out the brokerage firms –and there was a rumor that was started on Friday, the Dow Jones Industrial Average was down a couple of hundred points and it started out on CNBC and Fox Business Channel, that the Fed had opened up the discount window for Fannie and Freddie.

And here’s the situation: It’s not a liquidity problem with Fannie and Freddie, it’s a capital problem. There capital reserves are eroding due to the losses that it’s taking in the mortgage business. Now, this is off Dow Jones’ newswire:

Federal Reserve Chairman Ben Bernanke told Freddie Mac chief executive that Freddie Mac and Fannie Mae are eligible to use the Fed’s discount window, Reuters reported, citing a source with knowledge of the conversation. Bernanke told the chief in their phone conversation that he intended to allow the two government sponsored mortgage giants to use the option, the source said.

So here we have the market down 225 points, we went from a loss on the day, all the way up nearly 9 points, and then when it turned out at this point as we’re doing the show – the market is still open and trading – and just looking at Bloomberg and there’s nothing here confirming any of that. So right now, here is a story that just came off Bloomberg:

Fannie Mae and Freddie Mac may have several options for capital and liquidity, including gaining access to the Federal Reserve’s discount window, Senate Bank Committee Chairman Christopher Dodd said on Friday. Dodd, a Connecticut Democrat, said the Fed and the Treasury Department are considering a number of options, including making the companies – the biggest buyers of US mortgages – eligible to borrow from the central bank. “There are a number of things – including things like the discount window that they, I know, are considering,” Dodd said at Washington news conference. “They are certainly examining what other means might be taken in order to shore up a situation should it become necessary.”

So this just goes to show you – I’m thinking of calling up Bernanke and opening up the discount window. And what I’d like to do is borrow from the discount window, let’s say at 2 ½ percent and invest in dividend paying stocks at 5 percent. You know, if you’re going to do that for bankers, why not do it for the ordinary citizen. [4:06]

JOHN: Yeah, except that never flies in the halls and walls of either politics or of the Fed; you know that!

You know, if we step for a sec, Jim, and look at this very soberly, this is a ‘three-bottle-of-wine sail off into the sunset’ event, I think, because you have banks that are borrowing from the Fed, brokers that are now borrowing from the Fed, Fannie and Freddie are going to borrow from the Fed, and we’ve got a 300 billion dollar bailout. And yet, at the same time, politicians are telling us we’re going to have bigger and better social programs like socialized medicine – but we’re from a country that is essentially, right now, bankrupt and just won’t admit it to itself.

JIM: And that’s why we’re calling this segment the fork in the road because instead of a politician going before the public and saying, “look, we’ve got Social Security and let me be upfront with you – all of the surplus doesn’t really exist. We as a government have borrowed that surplus and spent it. We have various programs and commitments around the world where we simply cannot fund them anymore. So we’re going to have to tighten our belts, we’re going to have to go through a tough time here, but we’re going to have to rebuild government, we’re going to have to cut the size of government, we’re going to cut government regulations, we're going to cut taxes and we’re going to rebuild the government. But we have a government today that has essentially gotten so big, it is no longer capable of funding its spending programs.”

Instead, what you have is Barack’s got a trillion dollar new spending program; McCain – I forget what he wants to spend – if it’s three or four hundred billion dollars – it’s hard to get a handle on either candidate’s spending program because they’re so vague. They sort of tell you, “well, we’re going to do this and this, and the cost of those programs it’s very difficult to get a handle on.” But we have a government that is essentially bankrupt. We have a financial institution – our money center banks, which are basically insolvent; we have large lending mortgage organizations like Fannie and Freddie which are insolvent; and we have politicians who are promising the voters more cookies and candy.

And so, instead of telling people the truth, you know, what we’re doing is telling people that somewhere out there is a free lunch. And the hard reality is –Laurence Kotlikoff by the way, who wrote a book called Generational Storm – he’s got a new book out – and currently, unfunded liabilities of the United States are 54 trillion dollars and they’re going up at three to four trillion dollars a year. [6:44]

JOHN: So where is this all going to end? I mean sooner or later you would think the music would have to stop; I mean you can’t keep doing this indefinitely. What’s it going to look like if we’re headed for this shipwreck?

JIM: You know, eventually they’re going to hyperinflate. It’s what all governments are going to do because, as I said: What politician, if elected, would say that we’re going to cut government in half? Instead of 25% of the economy, we’re going to get government back down to about 10% of the economy; the Federal Reserve coming out and saying we’re going to raise interest rates until we wring inflation out of the system; a politician saying: “In order to get government off the backs of small businesses and the average citizen we’re going to lower taxes; and we’re going to change our tax system so that instead of rewarding companies or individuals for going out and taking on debt, we’re going to change the tax system to reward individuals for saving and investing. That’s we how built this economy in the early part of the 20th Century. And in the process we are going to tighten our belts and we’re going to go on a spending diet in this country. We’re asking Americans to tighten their belts and we as your government are going to tighten our belts.”

Now, John, what do you think are the possibilities we would ever hear that from a politician in either party? [8:06]

JOHN: Well, you’re not going to hear it. I mean Americans aren’t willing to do it because of the fact that Americans don’t see that they’re responsible for the problem. That’s the first thing. And if you look at Congress’s approval rating right now – where is it? Down in the single digits? I haven’t checked lately.

JIM: It’s heading towards to single digits.

JOHN: So they’re not going to do that either because they look at Congress and go, “hey, you guys, fat cats…” – remember Joe American earlier on in the program, “you got us into this problem, don’t expect us to get you out of it.” That would be the attitude. I don’t think that’s going to happen. And I don’t think politicians are going to try to deliver that painful message; that’s just not going to sell at the polls. They might tell it to you after election day, but not before; that’s for sure.

JIM: They’re already – and we’ve gotten emails, Q-Line calls where Social Security is negotiating Social Security benefits. The benefits that were given to you on your annual statements, they’re saying, “well, no, that’s not really what we can give you;” and they try to negotiate you down. And you can imagine some politician saying, “look, we’re going to have to get off Social Security, the system is bankrupt. There is no trust fund.” You could just see what his opponents would do to that person – whoever proposed it – in a political campaign.

The other thing that we’re going to eventually have forced on us (just as it was forced on Britain in the 50s and 60s) is we’re going to have to reduce our foreign entanglements because we can’t afford to be the world’s policemen spending money we really don’t have. [9:34]

JOHN: I guess the lesson of history is that getting off this train though is rather painful, no matter how you do it now. It’s like a drug addiction. We’ve gone on past here. You’ve talked in the past, Jim, about how when you get into an inflationary position, it’s very hard to get off it. Let’s face it, there has never been – as I know of – a nation in the history of the world which has peacefully gotten off of this without some political turmoil.

JIM: No, and usually what happens in the end is the currency is debased and the currency is destroyed – whether you’re looking at the Roman Empire, whether you’re looking at the Spanish Empire, whether you’re looking at the British Empire, or whether you’re looking at what is called the American Empire. And in the end, all governments take on liabilities, and take on fiscal spending habits that they can’t maintain. And what they do is they inflate their way out of it. And it’s only after the debt has been inflated – and I know a lot of people are saying, “no, we’re headed for a deflation.” There’s just no way that is going to happen because you have a situation where the government is the spender of last resort, and the Fed is the lender of last resort. And when you have a currency that has nothing behind it to back it up, other than faith, then that’s what happens.

And we’re in the process now – that’s what where we talk about this paradigm change – where we’re in the process of people losing faith in money – and it’s not happening just in the United States. It’s happening around the world – and that’s why you’re seeing inflation rates roughly about 7% globally and higher in some case, like for example, China’s inflation rate is much higher, and Eastern Bloc countries and some of the Latin American countries; and also the United States I believe the inflation rate is much higher than what we’re stating. And this is that fork in the road.

And we got to that fork in the road in 1979, and that’s when Jimmy Carter appointed Paul Volcker at the Fed. And it was called the Saturday Night Massacre. It was done over the weekend where I think he raised the discount rate two full percentage points; and he kept raising and raising interest rates, reducing the supply of money until he had wrung the inflation rate out of the system. And by 1981 and 1982 you got to the situation where real interest rates above inflation were at 5 and 6 percent.

Now, contrast that to where we are today, where you have a situation where real interest rates if I look at for example the Treasury markets, you’ve got yields on the 2 year Treasury at 2.6, the yield on the 10-year Treasury at 3.9, and you have headline inflation numbers – if you could even believe those numbers – are above 4%. So we have negative interest rates. And negative interest rates are equated with inflation. [12:27]

JOHN: If we combine what we’re talking about right here in terms of this crisis window we’ve referred to for a long time here – from 2009, 2012 – so we have these financial situations – basically, the US is bankrupt – that’s the bottom line. We’re bankrupt. Now it’s just a question of when do we get around to telling the people. So that’s number one.

Number two, we have a peak oil situation. I don’t think that the country has really grappled with the fact that this is a peak oil situation that’s not going away, and that this will affect the economy. And we’ve also outsourced a huge amount of our manufacturing, we’ve converted what we are. All of these things are warring together, and they’re creating a situation that in the very near future is just simply not sustainable.

And as part of the cream cheese frosting on the top, since we’re using analogies like Oreos – if you realize that major corporations – because of a lot of some of this outsourcing and other financial factors have cut about 30 million jobs. Small businesses on the other hand, are trying to bustle and boom – they’ve created about 30 million jobs, but the tax target now ( based on what we’re hearing coming from politicians during this election season) is going to be the small and middle-level business, the ones who are creating all the jobs. They’re the ones who need to pay more of “their fair share.” This is a suicidal recipe.

JIM: It is amazing, and we’ve been talking about the dark outer shell of the Oreo, and then next year, probably from the year 2009 to 2012, this crisis window – and that’s why – and I think we have made comments earlier – whoever the next president of the United States is, I hope they have stamina and I hope that they have leadership capabilities because from the day that president – whoever it turns out to be – whether it’s Obama or McCain – puts his hand and swears on the Bible – if I was the chief justice of the Supreme Court, I would put a fireman’s hat on the president because we are going to be enveloped by one crisis after another. In other words, they’ll put out one brush fire and that brush fire won’t even be contained when another one erupts.

And I mean here’s a good example: You remember last year, in February, it began with intermediate financial lenders; that crisis lasted about six weeks. When it was over everybody said, “that was it.” It erupted again in August and it went all throughout the second half of last year. It erupted again in the first quarter of this year, culminating with the takeover and bailout of Bear Stearns. And here we are on this Friday talking about the solvency of Fannie and Freddie – two quasi- or public or private institutions that stand behind 5 trillion dollars of US mortgages. And it’s like one crisis after another. Instead of the message, “hey, we have a problem here, we’re going to have to tighten our belts, we’re going to have to cut benefits;” instead, both candidates are promising spending for this, spending for that, spending for this. Where is all this money coming from? And what happens when foreigners begin to lose faith in this country and stop financing our deficits, stop financing our trade deficits as well.

And remember, it’s not something that can be corrected overnight because a lot of the goods that you see on the stores of department shores – whether it’s shoes, clothing or even electronics or even the things you see on the shelves of Wal-Mart, they’re not made here. So it’s not something like we can flip a switch like we did in World War II and turn the US manufacturing base from a peace time manufacturing base to a war time manufacturing system. We don’t have that kind of manufacturing capabilities. But as T. Boone Pickens laid out, he goes, “we have a chance to fix this problem;” and yet, John, nobody who’s running for office right now is sitting there leveling with the American public. And maybe we blame ourselves for that because a lot of people just don’t want to accept truths.

It’s almost like what we call the denial syndrome where you look at the issue and you just say, “you know what, nope, things will go back to normal” – as we talked about the paradigm shift in the last hour – and that’s where we find ourselves today because you take a look at, they’re talking about the Fed opening the discount window. You know what? The Fed can’t create wealth. It can’t create savings. It can’t create oil. The only thing that the Fed can do is create inflation. And what I worry about next is: what happens when – who knows what the event is going to be, where the rogue wave is going to emerge from, but it will be one more event that emerges out of nowhere at a time nobody expects or any of the experts didn’t foresee – it will be that one event, whatever it turns out to be which destroys the last remaining confidence in the US and what we’ve seen throughout history is few politicians will ever level with the public, John. It’s much easier to find a scapegoat or paint it in simple, “well, the reason oil is up is because of OPEC and the greed of the oil companies, or it’s the speculators;” or “the reason that inflation is rising in the stores is because of the greed of businessmen; the reason that inflation is rising because wage workers want cost-of-living increases.” (And this was the way it was attacked during the 70s.)

And in the end, I think what we’re going to do is – and John, you’ve seen this history – the country will lurch far to the left. The left will come in, mess things up so bad in the next election the country reverts and shifts far right. [18:23]

JOHN: We’re setting up here for a series hard, erratic corrections. That’s what we’re looking for in terms of the electoral cycle. And that’s not necessarily good on either of those.

JIM: No, and I think that the former director, Aaron Russo, in his documentary From Freedom to Fascism, and I think that’s eventually what we’re lurching to. And in the process, along with it will go liberty and freedom is destroyed.

And you know, it’s amazing as you study history, whether you study the Roman Empire, you read about the Dutch Empire, the Spanish Empire, they were all destroyed by the inflationary policies of the governments and the officials that ran the government promising more, and spending more than actually revenues would justify. And you can see this pattern repeated throughout all of history. [19:16]

JOHN: So what we basically have been saying through this whole segment on the program as we wrap it down, is the fact that we are at a crossroads right now as to which direction we will take. And this will have radical influences on the country in the imminently near future. This is important to realize: We are not talking about long term trends. Where it looks like we’re headed right now is to try to inflate our way out of this situation. Caveat. Warning. Whatever you want to call it. No nation has ever successfully inflated or taxed its way out of this situation – even though this is what the politicians try to do. It always ends in some kind of disaster.

And with the financial disaster usually goes some form of political disaster just like you were saying, Jim, and that is as a result of what happens. There is a moral component to inflation. A couple of weeks ago you did that whole series on the status of what happens during the period of inflation – the four steps of it – and the end is moral ruin of the country as well. And so all of this is not good when people lose faith – they lose faith in their government, they lose faith in most of the social structures of the country – all of these things are the result, believe or not, of this whole process called monetary inflation. They all go hand in hand.

I’ll be interested to see how this whole thing shifts though after the elections. As of Saturday here, July 12th, we only have 115 days left to go in silly season of the electioneering and the campaigns. And then it will be interesting to see where we move as we move into the change; how’s that?

JIM: Yeah, as we move into change – whatever party’s going to bring that change. But I think – you and I have contended here – both candidates have an agenda they would like to achieve or accomplish when they get into office. And I think, John, right after they put their hand on the Bible and are sworn into office, I think those agendas are going to get thrown out of the window as they go directly into the fire and begin dealing with one emergency and crisis after the other.

And just God help us that we have somebody who is a leader and knows how to handle, and has the experience to deal with these crises because you can just see them unfold. I mean every single week – John, we began the week with oil prices roughly in the lower 130s, and here we are ending the week at 145 as we had two series of events – well, actually, three series of events – we had a major drop in inventories reported by the government on Wednesday; once again, Thursday, we had three geopolitical events –Iran firing rockets, Israel responding, the rebels in Nigeria ending the ceasefire; and then the IEA talking about demand increase; and then of course, geopolitical events on Friday. So, like I said, we’re going to go from the frying pan to the fire very quickly here, and that’s what the next president will be facing, and what awaits whoever that person is going to be. [22:23]

JOHN: And I just want you to know, I’m going kayaking this weekend. It does not use fossil fuels, it uses glycogen in my heart muscles.

JIM: And I’m going sailing this weekend. I’m into wind, just like T. Boone Pickens.

JOHN: See, you’ve got to your spirit up as the country goes to hell in a handbasket. Jim and John either sail or paddle into the distance.

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

Cisco vs. Goldcorp with Eric King

JIM: Welcome back, everyone. Well, if there was a clear winner this week in the financial markets, especially with the turbulence with Fannie Mae on Friday, it was clearly gold: Gold ending up at 964.20, up a little over $16 in the futures market; silver prices moving up 50 cents at $18.74, as we move closer $19 an ounce. Joining me on the program is Eric King.

And Eric, a lot of jitters on Wall Street on Friday. In fact, as you and I are having this conversation, the FDIC – I just printed out a copy – just took over IndyMac bank. So, quite a lot of turbulence. We had talk throughout the day that the Fed was going to bailout Fannie Mae and Freddie Mac; then it wasn’t going to give them access to the window, but then you had Senator Chris Dodd saying that it’s one of the options that’s being considered. In fact, there was a story on CBS Marketwatch that said that right now everybody has access to the Fed window, so I’m going to line up and see if I can get some money from them.

ERIC KING: You want some of that 2% money; is that what the deal is?

JIM: Yeah, I want to borrow at 2%. In fact, this is a headline from CBS Marketwatch: “Fed can lend to just about anyone: Fannie, Freddie and even your Aunt Mabel could go to the discount window.” So maybe that’s it: Helicopter drops coming our way!

Well, listen, Eric, let’s talk about the gold market because it is resuming its status as safe haven; and a good example of that was Friday, where you had Treasury bonds going down but you had the price of bullion going up. So, why don’t we get into the gold market.

ERIC: It’s an interesting time in gold. You had Jimmy Rogers who was out there recently talking about investors should avoid the dollar; and that commodities are the best investment for this year. You have Faber basically saying – Dr. Marc Faber saying basically, “look, I don’t know what’s going to happen with oil –probably a big correction – but buy gold and buy it now.” So, I think that the smart money is doing what the smart money usually does, which is accumulate when they see a certain asset undervalued.

And I think when you look at gold today, it really doesn’t matter that it’s moved from 250 to, say, 950 – or wherever it’s trading – it’s just fundamentally undervalued. There are oceans and oceans of paper money out there. And when you quantify those and base them on current gold prices, you still end up with an undervalued situation. So I think that the bottom line is that people need to accumulate. There are things that are very cheap. We talked about the juniors. And of course people should be buying those. And Jim, you often made the analogy of the perils of the oil sector and the gold sector, and there haven’t been major discoveries, and companies are having trouble replacing their reserves; you have costs going up 15 to 20 percent a year – in both industries really; and also a shortage of personnel, I might add. So, I want to give your listeners a difficult perspective. I see parallels between the gold sector and the tech sector. And in fact, these parallels apply to any bull market. Investors will always pay a premium for the growth companies in a bull market. [26:56]

JIM: Why don’t you give us an example of that, Eric, because I think I know where you’re heading with this and I’m going to agree with it, but let’s get right into it. What parallels do you see between, let’s say, where gold stocks are today and let’s say, where tech stocks were back in the 90s?

ERIC: Well, and these have been in some of the articles that I’ve done previously, but you know, if you take a look at the early stages of the tech bull market, say around 1990 and you were thinking of technology, the foremost technology company was IBM. It had the largest cap, the largest sales, the largest profits and one of the premier stocks that investors would watch. But at the end of the bull market, fast forward to 2000, IBM had an 88.4 billion in sales, 8.1 of profit, and a market cap of 190 billion. So if you look then and compare that to a company like, say, Cisco, it only had 18.9 billion in sales versus the 88 billion that IBM had; 4 billion of profit, versus the 8 billion that IBM was showing. But their market cap, instead of 190 billion like IBM, was over half a trillion dollars.

The reason Cisco’s market cap was higher than IBM’s was because its margins were more than twice that of IBM’s and their sales gains were two to three times that of IBM, and people were willing to pay for that growth. Even if you look at today, over the last five years, IBM has grown its sales at about a five percent rate, and its profits only 7 ½ percent rate. But by comparison, Cisco’s grown its revenues by 12 percent, profit close to 20 percent.

So now let me draw the analogy of what’s going on in the gold bull market. If you look at the gold bull market from 2001, Goldcorp was say 3- or 400,000 ounce producer, today it’s estimated they will 2.6 million ounces of gold, and they’re on their way to 3 million ounces of production. By contrast, Newmont – after its merger with Normandy and Franco Nevada – has gone from 7.6 million ounces of production, to this year they are estimated to have a drop to 5 ¼ million ounces. So, shrinking production.

If you look at the profitability, Goldcorp’s cost of production is roughly $250 an ounce, in comparison to Newmont’s almost $440 an ounce. Those companies don’t hedge their gold, so they sell both their gold at market prices, but since Goldcorp can produce at a much lower cost, they have significantly higher margins than Newmont. Just like Cisco has a much higher profit and margins than IBM, Goldcorp is in a similar position versus Newmont. And because of the higher growth rates, and higher profitability it is reflected in the higher market cap and stock prices. Goldcorp has a market cap of about 31 billion compared to Newmont’s 22 billion.

In summary, in a bull market investors always pay a higher premium for growth and profitability. It was that way in the tech boom and it’s proving itself out in the gold bull market. [29:53]

JIM: That’s really a fascinating story. But in a bull market, Eric, as you know, what people want to see – let’s say it’s a technology bull market – okay, who are the companies that are increasing their sales the fastest; who are the companies that have the highest profit margin?

And as you just mentioned, you take it over to the bull market in gold, well, let’s assume this: Let’s assume that Newmont, Goldcorp, both of them are unhedged. So the thing that they sell – gold – the commodity, they all sell the gold at the same price. It’s denominated in dollars. If Newmont sells its gold unhedged at 964 an ounce, they’re going to get 964. If Goldcorp sells it at 964, they’re going to get 964. So the major difference between the two is who can either replace their reserves, increase their production because the more ounces you produce, the higher sales revenues, the more cash. But I think also, very significant here, if you’re a commodity producer it’s who becomes the lowest cost producer. And as you mentioned, Goldcorp at around $250 an ounce, compared to almost – more than $200 more for Newmont, so I would second that.

And I think that’s the reason why you can explain market caps of Goldcorp here. Let me just check on my Bloomberg here, but Goldcorp – of course, we had a rally on Friday – at 32 to 35; and you’ve got Newmont also rallying on Friday as investors went into that stock looking for a safe haven. And you’ve got Newmont here roughly at 23. So almost $11 billion more in market cap for Goldcorp that produces half the amount of ounces. Incredible. [31:35]

ERIC: I’ve always heard you talk about the large cap gold companies like large cap oil companies are having trouble replacing their reserves. That’s why the CFO of Barrick Gold is talking about they are looking to make acquisitions of late stage juniors that have two million ounces of gold or more. So the only way to do that is to make acquisitions. And Jim, you manage three companies, and you advise other companies, I mean how would you play this?

JIM: You know, if I was running a gold company, Eric, I mean let’s face it, if you take the S&P 500 companies – if you’re managing Cisco, you’re probably going to get a higher salary than if you’re managing Newmont. So, if I’m managing a gold company, I don’t about you, Eric, but who knows where the price of gold is going to be, let’s say, 10 years from now, 2018.

So if I’m looking at managing the company, okay, how am I going to get paid? Well, I get a salary, but where I really hope to make the big money is in my stock options. And how am I going to make that stock option go up? Well, I could rely on the price of gold, but people are going to look and say, gee, everybody saw their sales go up because the price of gold went up.

So I’ve got two strategies I can employ and I’ve got two wings in my company. I’ve got my geology team that drills the holes, makes discoveries, runs the projects on the mining sites, and then I’ve got my financial department – the guys that run the books, telling me what cashflow is, telling me what money I have at my disposal. Now, if I go to my geology team and say, “look, guys, we need to go out and make some new discoveries, so go out and discover. We need to replace our reserves.” Well, it’s going to take – I don’t care where you’re looking at today, and there’s not a lot of places you can go today because of increasing nationalism – but if I go out and try to discover a property and I’m lucky, let’s just say we find some place –Mexico or Canada or South America – from the time that we secure the property, get the permits, get the drills on the property, drill the property, go through and come up with a geological model, it’s going to take 7 to 10 years. Well, what good is that going to do me as CEO today? That’s not going to affect my pay package or my options.

Another choice might be is why don’t I go out, take my paper, which is very expensive right now because investors have bid it up, and I can go out on the block today and buy gold in the ground on a late stage development play from anywhere from $25 to $50 – the same price that juniors were selling back in 2003, and take that late stage development and bring it into production within three years. So that’s going to affect me more in my profits and my pay package and my option package. I’m going to see sooner results and it’s a lot safer road today.

And that’s why you saw oil companies doing the same thing because I don’t know about you, Eric, but I don’t know where the price of gold is going to be 10 years from now, but I do know that in this current market I have a fair degree of predictability given the economics of the industry, where it might be two to three years from now. So that’s why I think you’re seeing companies like Yamana, which went on an acquisition spree; Goldcorp which went on acquisition spree; companies like Agnico-Eagle which just invested in Gold Eagle and they made a $50 million investment; last year they brought Cumberland; and they’re going to bring Cumberland into production in the year 2010, within three years.

So, if I was running a company that’s what I would do because I don’t know where this market is going to be 10 years from now; what the politics are going to be, or what the fundamentals are; but I do know what the fundamentals are right now. [35:32]

ERIC: You know, this goes back to our taxi cab conversation. I set up for us to meet with Peter Marrone, Chairman and CEO of Yamana, back in 2004 and we’re in the taxi and we’re going to dinner and we’re talking about growth through strategic acquisitions. And Peter, being one to strike when he sees opportunity, used that strategy to increase his initial targets for growth for Yamana shareholders roughly seven-fold with regards to production. And subsequently, Yamana shareholders gained around 700 percent on their stock price from around the time we took that cab ride at the recent peak. And that’s one of the many reasons I had confidence recommending to your listeners back in late 04, beginning of 05, to purchase shares in Yamana when it was in the high 2s, low 3s. Companies that make strategic acquisitions that will add to future production are going to be the companies that see their stock rewarded and subsequently their investors will reap the rewards of those fine management teams. Just remember the example of Goldcorp versus Newmont. Where you are going to get the 10, 20, 30-baggers are going to be in the late stage junior plays that are going to be gobbled the Yamanas, Agnico-Eagles, Goldcorps of the world; and that’s just the feeling that I get and the feeling that my people have right now is the juniors are the place to be. [36:51]

JIM: Well, you know, it’s amazing because if you take a look at the gold market – probably over the last two years and I would say probably beginning in May of last year when the gold market corrected before it took off when the credit crisis began in August. Last year was the year that bullion prices – gold was up over 30%, the HUI was up almost 20%, so the stocks underperformed. And the story is really more refined than that because there are 15 stocks in the HUI, and you had a handful of stocks – about five or six stocks that really accounted for the majority of the performance of the HUI. There were companies that were flat for the year and there were companies that actually went down in last year’s market. But if you look at the top performers in the HUI last year and this year, what are commonalities: Agnico-Eagle, Goldcorp, Yamana, Kinross?

Well, take a look at what’s happening with these companies. Agnico is going from a quarter million ounces in production; this year they’ll do 360; next year they’ll be over 400; they’re going to over a million. If you take a look at Yamana, which was 283,000 ounces back in 2006 and this year they’re going to fall short of some of the expectations, but they’re going to be over a million ounces. If you take a look at Kinross over the last couple of years, they’ve gone from 1.4 million to almost 2 million this year. If you look at Goldcorp, they’ve gone from roughly a 1.7 million, to this year 2.6.

And so there’s a reason why these stocks are going for premiums and why they’re the leaders. It goes back to your Cisco story about tech stocks. People in a bull market want to go with those companies that are growing, increasing cash, increasing sales, increasing profits and a commodity market with a price going up. What distinguishes you from your competitors is how fast you can increase your production, or how low you can keep your costs in comparison to your peers. [38:59]

ERIC: Well, since we both agree on this, how do you see this acquisition scenario unfolding? I mean both you and I favor Mexico; are there any other areas that look attractive from an acquisition standpoint?

JIM: The one concern that I think a lot of people have today – and I don’t care if you’re an energy company, base metals company or even a gold or silver company – is the increase of nationalism around the globe. So I think that if you want to make an acquisition of a junior, you want to make sure that if you do spend the money to buy the company, you’re going to be able to take that mine into production – that you’re not going to be hit with a series of environmental suits, permit delays, or the government is going to say, “well, I’m glad you built the mine, but you know what, the deal that we had, we’re going to change it now; we want 80% of the profits.” So I think safe jurisdictions.

One of my favorites are probably Mexico because of the cost in terms of peso, and also the mining culture there. Canada would be another one. I think the state of Nevada; maybe Alaska. There are certain countries in Latin America; if you take a look at Brazil, how well Yamana has done there; and Brazil having not only plenty of energy but mining structure to facilitate that and access to cheap energy. And I think having access to cheap energy is also going to be important. So those are probably some of the areas. And also China, which has become the world’s largest producer of gold in the world; taking the place of South Africa which continues to see its production decline. So, those are probably just a few of the areas that I would see. [40:35]

ERIC: The people who are left in the junior sector are strong hands. And there’s been a handoff from weak hands to strong hands. This is somewhat similar to sort of the small cap oil stocks from last summer. And I remember going back to 2000 even (late 99 to early 2000) when you had eleven dollars and change for a barrel of oil and I was buying these stocks because I didn’t think they were going to last. I thought it was the play of the century. US stocks like Global Marine at $5 and change, those all went up double-digit-fold. I don’t remember if it was 10 or 20-fold or exactly how big the move was, but it was huge. You had Maverick move from 5 bucks to 65; RMB Falcon got to 5 bucks and was taken out at a huge price gain; you had Patterson Energy split-adjusted $1.31 goes to 39 – up 35-fold. So, when you look at what happens in these types of consolidations in bull markets and you go back to even last summer, when you look at the small cap oil stocks, why don’t you elaborate on that because you could have bought those cheap at that time, and oil had had a big move already at that point. But those stocks really hadn’t gone anywhere; had they?

JIM: No, it was amazing because you remember last year, we started out the year and oil dropped to 50 bucks in January and they were going through like a two-week warming spell in New York – I think guys were wearing polo shirts in the middle of January. And the experts were telling us, as the US economy began to slow down, the price of energy was going to come down. Well, guess what? It didn’t. The price of energy went from 50 to ending up almost $95 at the end of the year.

But it was amazing, Eric, because natural gas was out of favor, it was down in the six and seven dollar range, and yet there were companies and they were natural gas producers – one of our favorites – and it was expanding its production, once again getting back to your analogy with the techs and Cisco and Goldcorp, and it was increasing its production. It had a major stake in the Barnett Shale, and you could have bought this stock at an incredible single-digit PE ratio and the company was growing its earnings and its revenues at double-digits, and it was virtually being given away. It had done nothing for almost 12 month period of time. It would go up, it would go down, it was trading at a very narrow trading range. But, you know, that stock went from the low 30s all the way up to $70. And I think we’re going through one of those periods right now where you know, Eric, any time the price of gold goes up – like the day you and I are talking, the HUI is up 5%, the XAU is up 4% - but where is everybody going into? They’re still going into the large cap stocks because nobody believes this gold market is real yet. [43:19]

ERIC: I agree with that. And that’s the feeling you get when you watch the tape because you really don’t have the money flows coming into the juniors. And when you talk about last time from 1976 to 80, you had a 50-fold increase in the participants in the gold sector and you end in a mania and you have this massive explosion, it’s a small sector. And you start to look at the juniors and then it’s a really small sector, particularly when you look to find quality. And so you have some of these companies out there right now, where investors have been discouraged and these are really – you almost have to call them battle-hardened veterans because these are not people who are going to sell. They’re not going to shake these guys out. And we might be getting some weak hands – just can’t take it anymore and throw up their hands and maybe redeem some money from funds and there’s a little bit of selling, but in general the shakeout has been done on these.

And it just reminds me of one of the most valuable things I learned from studying Jesse Livermore, “it was never my thinking that made big money for me, it was my sitting. Men who can who can be both right and sit tight are uncommon, I found it one of the hardest things to learn.” So that’s just a great quote from there, and my biggest gains have been made by my sitting, so I think for people that are in these, obviously you’ve got to hold, that the upside from here is – like I said, when you look at the 70s, stocks went from – really there was one I think went from 7 cents to 385 bucks or something –but a dollar, or two dollars, to 4 or 5 or 6 hundred bucks a share. Now is the time to be committing capital. You have people that are underweighted in these sectors. Guys coming out of real estate who have cashed out a lot of money – and a lot of big money, that will start to come in here, that really is tremendously underweight this sector.

And as they start to put that money in, it’s hard for them really to figure out where do you go in the junior sectors, are there funds set up for this? And I think as we go along we’re going to see junior gold funds pop up at all the major brokerage houses and they’ll be a way for people to sort of funnel money into those and get into those that way. And then Sprott has a fund, guys like you have a fund. But you guys are sort of trailblazers and I think all of this will start to evolve and people will have a way to get in. But people are tired of seeing their money evaporate. They understand inflation has really been skyrocketing and that their money in bonds is getting wasted day by day by day. So, net, people understand that sitting in cash is a losing proposition. And I think a lot of people are going to start to really come in to this sector in a big way. [45:56]

JIM: You’ve seen this, Eric, we’ve just commented about what happened to like natural gas stocks and some of the mid-size energy – and right now, juniors have just been going nowhere. We had a caller on the Q-Line and he was talking about a company – Royal Gold – and he said, I can’t understand why this stock is going nowhere. They’re a royalty company; they’re making more money as the price of gold goes up. And we were answering that question earlier in the program, prior to you and I discussing this; and I sort of just went through the balance sheet of this company. Their revenues have gone up three-fold; their earnings have gone up nearly four-fold; and everything is going well for the company but the stock is up about 12% for the year. And the reason that it hasn’t gone anywhere is there is a major short position; 10% of the stock has been sold short. So I think a lot of this is it became a play.

There are two things that went on in this sector. One is as the credit crisis unfolded and took people by surprise – especially the suddenness of what happened beginning last August, and how it continued to unfold – remember when it first began to hit the headlines? It was, well, there’s $200 billion in losses; then that figure in a couple of months jumped to 400 billion; by the end of the year they were talking about one trillion; and now the latest figures are 1.6 trillion and here on the day that you and I are talking, we’re talking about the solvency Fannie and Freddie – two GSEs that stand behind 5 trillion in American mortgages. So I think there’s been a reluctance to risk as these things unfold, so I think that accounts for part of it. And then also, I think the other side of it there’s been a large short position, and I think short selling came into this sector with the hedge funds and I think that has also had an influence – as you know a lot of these juniors are very thinly traded. But if you hold a position, you don’t lose; and I think the shorts are going to be proven on the wrong side of this equation. Especially, I mean, goodness, just take a look at the headlines, this is just from today – I’m reading you off Bloomberg: Paulson says regulators support Fannie and Freddie; IndyMac Bank Corp. seized by federal regulators after failing to raise cash; Fannie and Freddie say capital levels are sufficient; Fed says it hasn’t talked to Fannie; Senator Dodd says the Fed should be open to lending money to Fannie; Fannie Mae slumps, Freddie Mac recovers in the biggest trading day on record; Fannie and Freddie turmoil may push up mortgage rates; McCain says Fannie Mae and Freddie Mac are likely to need government help. That’s just today’s headlines! And people want to know why are people turning to gold? Hello! [48:50]

ERIC: You talked about some of the Q-Calls and here’s an email, if I can read this very quickly that I literally just got I think yesterday.

So I write to you in regard to SVM Silvercorp Metals which trades on the TSX. I’m a long time holder of the stock and recently backed up the truck between the 5 and 6 range for more shares. I believe that there has been an orchestrated attempt to manipulate the stock price to drive it lower. The company has great fundamentals. It has reported earnings up 170% in the last month and yet the stock price has been completely trashed. From what I have learned recently, naked short sales are not illegal in Canada. If this is true, how can the average investor get a fair price for shares he purchases in Canada. What’s to stop the short sellers from completely taking a stock apart, robbing the average investor of hard-earned money? Is there anything that can be done about this? I fundamentally believe in this company, but what is currently transpiring with the share price is scary. It has broken all technical supports and looks as though it will break down in the low 4s.

This email reminds of when I was telling the Richard Russell subscribers to go out and buy physical silver, and it was in the 4s, and so many of them did that. And a lot of them just kept buying and buying and buying because once they started to do it they wanted to keep doing it. But there was a lot of propaganda back then. And Jim, you probably remember this but they would try to scare you out and they would try to put out stuff about digital photography, and this or that, and this nonsense or that nonsense. And a guy who later became a newsletter writer asked me, you know, “what do you think is going to happen to silver because I don’t see how this manipulation is ever going to end,” and he sent some over to me. And I don’t remember exactly what I said to him, but here you had a case of silver being subsidized, so instead of complaining about it, here I am, we’re backing up the truck. We buy over 3 tonnes of physical silver and we take delivery and the idea was is that the price is being subsidized.

You are having that exact same thing happen with these juniors today. That is the time to get aggressive, to get very involved in this sector and you have to pick quality, so I think it’s tricky for most people but here’s a stock – this Silvercorp – and I don’t own this, so I don’t mind talking about this stock – but it looks like they’re doing all the right things from what this email says. And I don’t want to comment in favor or not in favor of this stock, but you get the idea that here’s another company that’s doing all the right things but the stock is getting trashed and then people begin to question themselves, like we talked about – almost the emotional toll it takes on people. And people begin to question themselves. “What did I miss here? Did I miss here? Did I do the right thing?”

You know, it reminds of me when I bought Carl’s Jr. down from 43 bucks a share, average 4.80, and it got down to a 1.94 a share and I’m down hundreds of thousands of dollars and I’m saying to myself, “What did I do wrong here?” because I knew the break up value of that thing in a liquidation fire sale pre-the-retail-markup was 7.05 a share. So, knowing that, I knew that it was going to go higher and it was just a question of when. But the point is that it took time but the stock was being manipulated down and eventually I think it made its way up to 23, 24 dollars and it came back down from there. But the point is that there is a stock that went 1200 percent from there before it backed off.

So, you have to basically take advantage of these times. You have to get involved in stuff that’s being artificially manipulated. It takes guts and it takes courage but that’s how you make the big money. The mistake that most people do is they won’t be buying this stuff until it’s hitting new highs or making an intermediate top, and when these juniors take off, nobody is going to ring the bell. They’re going to take off. It’ll be like just a rocket when it takes off. And people will go, “I’ll buy the pull-back,” and the pull-back won’t come. So you’ve just – now is the time. And if you’re holding this stuff and you’re having doubts, don’t. Hold on to your quality shares. You will be rewarded. [52:55]

JIM: You know, it’s amazing too because we got these same arguments –and I want to give Dave Morgan credit. He introduced me to the silver story back early in 2001, and I got a hold of the CPM silver book and I could remember calling Dave after I read the book and I said, “this is too good to be true. This can’t be true. This is like the buy of a lifetime.” And I can remember, Eric, and you remember this because you were in the silver market, so I began buying physical bullion in the upper 3s and then in the 4s. And you remember for what? It was almost like a three-year period I can remember having Dave on the show at $4, the commercials would cover their shorts and go long, silver would go from 4 to 5. At 5, they would come in with their shorts, pile in, drive the price. So every time it got to 5, they knocked it down to 4. It was 4 to 5, 4 to 5. And this went on for a couple of years and you know, I just kept buying and buying. I know that you were buying and buying. And Dave I know was buying and buying.

And people were saying, “gosh, if the shorts can manipulate, you know, they can manipulate gold” and you remember talk about intervention in the gold markets, central banks. Well, here we are, what, six, seven years later and on this Friday, silver prices are at close to $19 an ounce, gold is on its way to $1000 an ounce. And the same thing is going to happen in the junior sector because you and I know, Eric, from years of experience you can manipulate, you can, let’s say, paint the tape, and you can create a short term impression, but if you are going against fundamental trends you are going to lose.

And just as everybody is short right now, at some point this market is going to change and the opposite will occur and that’s why the most important thing to do is, as you mentioned, if you believe in something you hold it. You add to it. You accumulate. I mean I accumulated three years and the price of those assets virtually went nothing. I mean, yeah, it would go from 4 to 5; 5 back down to 4. But, you know, to me I thought “they knocked it down to 4, I’m buying again.” And so I think that’s the attitude. And I think rather than trying to out guess –“hey, is this the top?” “is it going to correct next month?” – put together a savings program. If you’re buying bullion, you buy it every month. If you’re buying shares, you’re adding to your shares every month, and quit worrying about the price and start thinking psychologically, if the price goes down I buy more shares. And when this bull market enters its next phase, I think in the process of doing now, the only thing that you’re going to care about when this thing ends is how many ounces and how many shares you own. [55:47]

ERIC: I agree wholeheartedly. It’s one of those situations where I think that the explosion is going to be massive. And you know, when you look at stocks like Aurelian – and it’s around 5 today, but let’s just say it’s up 50-fold or so, or 60-fold from the lows; you had a stock like Silver Standard, you know, that’s gone from 50 cents to 30 bucks, so it’s up 60-fold. Those are the kinds of gains you could realize, Jim. You know this, so I don’t need to tell you, but when you buy quality and you get I involved in the right stuff – I think part of the problem that’s going to happen for people –and I’ve sort of brought this up a little bit but is redeployment. Let’s say you’re in a stock, and it’s a junior and it gets acquired. Well, now you’re in some lumbering dinosaur like Newmont Mining, and if you’re aggressive you want to kind of want to work your way out of that – not that it won’t go higher. It will. But the point is you’ve got to redeploy your capital. And that’s why there’s so much homework and it’s a people business, gotta be connected; but I think that’s probably some of the problem. But that’s a good problem to have. It means you made a lot of money. Your stock went a lot higher. Somebody brought you out and now you just have to find something else to move your money into. But people are going to be handsomely rewarded. I think the longer some of these juniors stay independent, the more money that’s going to be made.

I mean, I remember when we first started talking to Peter, you know, at 7, 8 bucks a share and everybody would have made fortunes on Yamana, that particularly were in on the seed rounds very early. But Peter got his arms around this market quickly. And he realized, “wait a minute, wait a minute, I can sell this thing and walk away, but I could build something and make this into a massive company, and become a Pac-Man and acquire companies and build my production.” And instead of thinking 7, 8 bucks a share, he started to think 20, 30 dollars a share. And that was the right way to think. You need to make sure if you’re in these companies that you’re with someone like a Peter Marrone or a Sean Boyd or Kevin McArthur over there at Goldcorp – people that understand the need to make acquisitions, and understand that that’s how the Ciscos of the world, and some of those other networks…Look, Jim, you put a thousand bucks into Cisco in 1990, you’ve 1.64 million dollars 10 years later. So you want to be in the companies that are going to understand this going forward. And I think, you know, look, these are great companies – the Yamanas, the Agnicos, and the Goldcorps – my issue is that the real value today, the real value, the steals right now, the grossly underpriced ones are the juniors. And that is where fortunes are going to be made. [58:35]

JIM: You know, I couldn’t agree with you more because I got involved in juniors going back 2001, and Eric, gold was somewhere working its way to $300 an ounce, and if you could buy juniors – I mean as I learned more about the industry, you know, you were trying to buy juniors with gold in the ground at 25 to 50 dollars an ounce; and you know, you were considered to be making a good purchase. And so here you were, buying companies at $25 an ounce –$50 an ounce, let’s say, on the high side – when gold was at 300. Here we are, what, seven years later, and we’re looking at gold at 964 an ounce, silver at close to $19 an ounce, and because of what has happened over the last 12 months, they have knocked juniors down to the level – I was talking to somebody who is very, very well-connected to let’s say sovereign wealth funds. And that is something that the sovereign wealth funds are looking at; “Okay, we can buy gold…” and they’re buying gold, but they’re also looking at the mining industry and taking a look at the cheapness of it.

And the amazing thing about this, Eric, this reminds me – and it was 1998, and it was the summer of 1998, we took the family down to Cabo San Lucas for a vacation and I was reading the front cover of BusinessWeek. It was on Richard Rainwater. And remember, this was 1998; the technology sector is in full bloom. The only thing anybody wants to hear about is Amazon, AOL, Cisco, Intel. And they interviewed Richard Rainwater, and they were basically saying, “Has this investment genius lost his touch?” because he was buying real estate, he was buying energy, and he was buying health maintenance organizations. And I thought, “Here’s a guy that made a lot of money, he was an advisor to the Bass brothers out of Texas, made a lot of money also for himself and the Bass brothers in the real estate crisis in the early 90s with the RTC.” And here was 1998, because you remember then, nobody wanted to hear about real estate… [1:00:56]

ERIC: No.

JIM: …And nobody wanted to hear also about energy because oil prices had dropped to $10 a barrel. And they were kind of looking at this guy – (and you remember them making fun of Warren Buffett. It was like, “Gosh, Buffett is not buying tech.”) These geniuses in investment had lost their touch.” And that was 1998, he was buying real estate and he was buying energy. And guys like Jimmy Rogers were buying commodities, and it wasn’t until, what, 2002, that the price of energy started to take off. It wasn’t until 2002 that the price of real estate really began to go into a bubble. But these were guys who had foresight and were willing to take the vision and hold on and buy something that was being given away. And I think that’s what you have to do in this gold bull market. [1:01:47]

ERIC: I experienced that first hand. I had traders laughing at me, when I put everything we owned and called it the play of the century into some of those smaller drilling companies that I mentioned to you, Jim. They were laughing. And I said to them, “do you honestly believe that we’re going to have cheap gasoline forever? I mean is that your position?” And that would kind of end the conversation because they realized, oh no, that doesn’t stay like that. And with silver, the same thing. But I had it vaulted in the bank – my silver – and the number two guy at this bank and looks at me (and we’re good friends now today), but he says to me, “you know, a lot of guys have tried this over the years, but it hasn’t worked out.” And I think I said something to him like, “well, they don’t have my timing.”

It’s almost like to become very wealthy, to become very successful, you have to do something like – was it Faber or somebody who said, “that almost no other person would even consider doing, or remotely consider doing.” And I think for people out there that listen to this show that have been on this for years, it’s probably a little spooky to them, the idea of buying some of these juniors – and now they’re holding their arms around it, they can understand the concept. But by doing that, by doing something that almost nobody out there would even consider doing, that’s how you make a fortune. That is what you are supposed to do. And if you have people making fun of you, that’s the best position you could be in because then you’re almost assured you’re doing the right thing. [1:03:22]

JIM: Couldn't agree more.

ERIC: You know, right now, Jim, you have everybody crowding into these large cap stocks and you'll see gold take off, silver will take off and you can pretty much put your trading screen up and you've got Agnico up two or three dollars…the usual suspects, right? Usually you've got Yamana up, you've got Goldcorp up, you've got Agnico-Eagle going up, two, three bucks for Agnico, whatever. But everybody crowds into those. But when you look at this acquisition phase that's in front of us, Jim, how do you think this is going to play out? [1:03:52]

JIM: You know, I think it's going to have to take a sustainable advance above a thousand dollars an ounce; and gold is going to have to go from 1000 to hit new record levels and stay there. But I also think that just as we saw on this Friday, you have the HUI and the XAU, same thing is happening, everyone rushes into Agnico, Agnico’s stock is up 4%, Gold Corp up roughly about 5%, but you're talking about a handful of stocks, five or six stocks. In fact, if you look at the total collective market cap of the HUI, it's roughly about 160 billion. That doesn't even come close to the value of Microsoft. And I think that game will continue to be played, but then eventually, Agnico will be over 100 bucks an ounce, Yamana will be in the 30s and 40s and people are going to be saying, “We can't all be bidding the same five stocks.” So then it starts working its way down the food chain and so they start going to the intermediate producers, maybe you go into a Northgate, you start going into some of the other guys on the totem pole.

And then eventually what will happen is as these market caps increase for these large producers, they are going to do just exactly what I would do as a CEO – and what we've seen many of these guys that you and I have been talking about – the next step is going to be, and I predict within a 24 month period, all of the two and three million ounce late stage development plays around the globe are going to get gobbled up. They will be gone in the next two years. If you have a deposit in a safe jurisdiction, you're developing it. So eventually it will work its way down the food chain, the intermediate producers will fall next after everyone gets tired of just putting all of the money in the majors and then it's going to filter down and then you're going to see an acquisition spree like you've never seen before.

It will be kind of like what we've seen early in this decade and mid-decade in the oil sector as one oil after another got bought out. And it's going to take place in the junior space, and then I think, Eric, you know, when gold is at levels –I don't know if it's 2000, 2500 or 3000, then I think you're going to see moose pasture. By that time, moose pasture will be selling for a billion dollars. But that's how I see this thing unfolding as we go forward.

Listen, Eric, I know it's late Friday where you are, and I know you have to get out to dinner, but I want to thank you for joining me on the program. We had a lot of requests, Eric from a lot of our listeners. They wish that you would start a newsletter. You're probably one of the most requested guests, along with Dr. Marc Faber here on the program. I know you have decided not to do that.

ERIC: Well, if people are interested, Jim, they are reach me at EricKing5@live.com.

JIM: Well, Eric, it's always a pleasure to have you on the program. Thanks for coming on, and you and your wife have a great dinner.

ERIC: Thank you, Jim.

What It Means To Be a Millionaire

JOHN: Well, now, I sit here Jim feeling like Ebenezer Scrooge counting my riches.

You know, the concept of what used to be a millionaire, my mother, I don't know if I ever told you, my mother during her early life was J. Paul Getty’s private secretary for a while. He had two or three of them and she was one of them, and that was when a millionaire was really moolah – do you remember that way back when in the 20s and 30s. And now that's different today, when we hear people talking about we're going to tax the rich, you look at a certain amount of dollars, I remember when I could live very happily on 10 or $12,000s a year as a bachelor and still own an airplane. That was a long while ago. Now, it doesn't really mean much to have $1 million in assets, especially in houses. Depending on where you live especially on the left and right coasts, a simple house can cost that much, and it may not be a very big one either. And so we're watching inflation take the whole middle class and raise them into that supposed millionaire category, so this section we're going to talk about what it means to be a millionaire. Why don't you swing it from there.

JIM: I had an individual who walked into my office – and I’ve got permission and I'm going to sort of change things around obviously to not get really into directly this person's background, but I'm going to try to put into perspective a million dollars.

John, if I told you a person was worth, let's say, 1.2 million dollars, you'd say “wow, these people are well off, a millionaire.” And what was absolutely amazing, this was an individual who grew up in a socialist country in Europe, came to the United States in the 70s because of oppressive tax rates, because of the political freedoms etc, got married here and in the last couple of years this individual lost her husband, and her husband passed away.

This person prepared a balance sheet and income statement for me to look at, and we were talking about some serious problems that she was facing. One of them was income. Her income wasn't keeping even, and I'm going to talk about her net worth here in general terms. She owns a house in a retirement community of about $500,000, it's down roughly about 15% from where she purchased it. But the house was bought free and clear, so let's say the house is $500,000. Now, for many of you listening to this program depending on where you live, if you live somewhere in the Midwest, $500,000 probably buys you a mansion. In Southern California, $500,000 is a 2100 square foot house that needs some repairs, and so you're not talking, John, Beverly Hills, Rancho Santa Fe or some exclusive community.

Now, in addition to $500,000 in a free and clear home, this individual has close to about $600,000 in assets: including an IRA, $50,000 in a bank CD at the local bank in this retirement community with an interest rate of about 3%; roughly about $20,000 in US savings bonds and a cash value of a long term insurance, long term care policy of about 27,000. So the net worth of this individual, John, is 1.2 million. You know, if you look at the percentage of Americans that have that kind of net worth, that probably places this individual probably within the top 5, 10% of individuals in this country.

But once again, out of the 1.2 million, 500,000 is in a free and clear home and then roughly 27,000 dollars is in a long term care policy that would take care of this individual if they had to go into a long term nursing facility.

Now, looking at that person's income, when her husband passed away, she got his Social Security, so she has roughly about $1100 a month coming in from Social Security. She has roughly about $600 a month coming in from a pension, and roughly about $900 a month coming in from investments. And this is one of the problems that a lot of savers like this individual faces today with inflation running at 4%, most people that are saving are not getting a rate of return, whether they are in Treasuries, bank CDs or fixed income in vehicles, the interest return on these fixed investments are not large enough to cover this person's retirement. So, in total, this person has roughly a little over $2500 a month income. Let's just round it off to 2600 – a little less than $31,000 dollars a year income.

And now, remember, $31,000 of income. Her property taxes are 5700. On a person that makes a little over $30,000 a year, $5700 went to property taxes. She had homeowners insurance annual –and this is a budget that she prepared, these are her fixed costs – $5700 for property taxes, $770 for homeowners insurance, $850 for an automobile that is probably, what, 10, 15 years old; car registration for smog, 100 bucks; and then $2300 a year fixed costs for her long term care policy.

So in terms of fixed costs, she had roughly almost $11,000 of her annual budget of a little over 30 was fixed between property taxes, insurance in a long term care facility. She has $250 a month in a homeowners association. Her Medicare insurance is $175. Her water bill is 45, her STDG&E electric is 70; 35 dollars for phone; 45 dollars for trash and about 14 bucks for basic cable. So about roughly - let’s just round it off – $650.

Then, because of her age, she has a handyman to take care of the lawn, that's running about 300 a month; her personal grooming $90 a month, medicines and prescription drugs $50 a month; pet food about $25 a month; gasoline for the car, $200 a month. So another $665. And then food another variable of about 905. So total expenses roughly about $2200 a month. And then you add that to the annual fixed cost. And so roughly, her expenses are greater than what she has in income. The $5700 needed to pay the property taxes is taken as an IRA distribution or principal from her account.

And so, if we start out the story and say, this person is a millionaire, but here she is at the end of the year having to take principal out of her account every year just to pay her property taxes. In other words, the income that she is getting from her investments plus the pension that her husband's pension is roughly $575 a month, that's fixed, it doesn't go up; her social security of roughly almost $1100 a month, goes up – it's a negligible amount because the deductible and the other parts of Medicare eat up into that. So here is the situation, this person on paper is a millionaire, but it doesn't mean much. [1:16:19]

JOHN: But what this is doing, Jim, is it's putting more and more people in hard straits because everything is going up and up and up and up and up, they are struggling to get along, but there is no abatement in the various machines – and I call them ‘tax machines’ – at different levels, either at the state, the local or the federal levels to abate this increase in pressure. We've seen phenomena here where people bought property, say, oh, 20 years ago as retirement property –and where I live property (until recently, thanks to an influx of people fleeing your state) has been relatively cheap – but now all of a sudden over the last, probably 7 years the demand has gone through the roof. We've been discovered by the glitterati, and now people's property taxes are going up and people are having to move out of homes they originally bought 20 years ago to retire in because the property taxes are valued on the current value of the property, not the value of the property at the time of sale to you. That's why you remember you in California had, what was it, Prop 13? That was the whole thing that centered around that. [1:17:21]

JIM: Yeah. But even though we had prop 13 to keep the annual increases to a minimum, John, what happened is the governments figured a way around that through assessments and fees. So I mean they are in one way or another, they are getting that money. But you're right, from an annual basis at least there is a limitation in terms of the amount they increase your property taxes. But this individual had, given her age, most of everything was in fixed income and what she was finding is, you know, she was talking about how much she has to spend for food today, how much she has to spend more for prescription drugs. She's talking about how much she has to pay for her homeowners insurance is going up, her automobile insurance is going up, her car registration insurance is going up, her cable bills – all of these bills were going up and being invested in fixed income.

So one of the things we're going to be doing is shifting a strategy for this person to get her into some basic necessity kind of companies or stocks that are blue chip companies that increase their dividends 10 percent or more a year because otherwise, what is concerning her is she is liquidating her principal each year in order to stay even. So first it was taking a little extra out of the account to pay some bills like fixing things up around the house, then it was taking annual distributions to pay the property taxes. And then there is more fix up around the house. She needs a new car, so she's worried about eating into her principal.

And this is a person where longevity runs in the family; her parents or her mother lived well into her late 90s and her father into the late 80s. So this individual is saying, “I'm very healthy and what concerns me is I'm liquidating my principal and everywhere I look, everywhere that I spend money, it is going up.” So if somebody is in a foreign country and you're saying wow, what would it be to be worth a million dollars or a million two, but here it just goes to show you, California, a half a million dollar house is a basic house and it's probably a house that's older, it's probably a house that has to have a lot of repairs done to it, and a half a million dollars today –if you want something nice – would probably only buy you a condo.

JOHN: I think it's only going to change pursuant to what we said in the last segment and that is when the pain gets so bad, people will demand the change. Until that time, we're just going to stay on this trail. That's where we're at. It's unfortunate but that’s where we're at and you have to plan accordingly.

JIM: Obviously, Jim, you're trying to deal with what this woman's needs are by arranging her portfolio in that kind of a manner – but remember, you talked about paradigm shifts earlier. Paradigm shifts change the way everything happens. And if we're in a time of inflation like this, then you have to have something in your portfolio that rises as the value of money devalues. It's a whole different strategy. The old one I remember of our parents, you know, they worked for a company, they got a pension, they did this, money was fairly stable. I remember when my dad retired, he was able to pour most of things into T-bills and it had a pretty good yield at the time, but that all changed.

JIM: Yeah. I mean if you looked at when Volcker came in at the Fed and began ratcheting up interest rates to get rid of inflation, John, you could get, and I'm sure people who are older than ourselves listening to this program remembered that in the early 80s, you know, you could have got CDs at banks that were paying 12, 14%. The average dividend yield on the Dow was 7 ½%; dividend yields on utilities were close to 14%, you could have got 9 or 10% on a tax free bond, 15% on a treasury. Those were real returns.

You fast forward almost three decades later – and just like this woman, that old paradigm doesn't work. So what we're going to do is be putting her into energy, putting her into some water utilities. The only exception this time is I'm using foreign utilities in very strong countries that have much better dividend yields and are selling at cheaper prices. But I was basically saying, “look, unless you do this, you're going to be spending more and more of your principal. The more principal that you spend, the less income you will be receiving which means the more principal you will have to be spending.”

And for somebody that could probably live, given the longevity in this person's family, another 15, 20 years that could be quite frightening for a person. And so what we're going to be doing is we're going to be hedging and we're going to be starting out gradually with some things that can produce dividend yields that go up. So instead of seeing her income go stagnant or in fact go down, she's going to see her income go up and it's going to be the only way that we’re going to be able to do this, John, because otherwise it just becomes a declining trend. So there are solutions but once again, as we've been talking about, throw the old rules out the window because we’re heading for an era of inflation and in an era of inflation, you'd better have inflation protection. [1:22:37]

JOHN: Indeed. We'll see what our listeners have to say coming up next in the Q-lines. We'll be back in a second. This is Financial Sense Newshour at www.financialsense.com.

Part 3

Q-Calls

JOHN: Well, you may know the shtick. I have to do the shtick, but that's the way we do it here. Welcome back to the Financial Sense News Hour, time for the Q-lines, which means our question lines. The Q-lines are open 24 hour as day to record your questions and comments for the show, not for technical help. Some people call that line and we only check the download voicemail on that like once or twice a week. So if you're calling us for something like technical help, that will not happen on the Q-lines.

The number, toll free US and Canada, (800)784-6480. That does work for the rest of the world. But you have to pay for it outside of the US and Canada. Please remember as we answer your calls here that the content on the program, especially your answers here are for informational and educational purposes only. And you shouldn't consider that as a solicitation or offer to purchase or to sell securities or other issues. Our responses to your inquiries are based on the personal opinions of Jim Puplava and because we don't know a lot about you, we can't take into account your suitability, your objectives or risk tolerance, and because of that, these are generic answers to whatever information you give us. Financial Sense Newshour is not liable to any person for financial losses that result from investing in companies profiled on the program etc.

Please remember to keep your comments down to a minute if you possibly can because we just can't handle anything longer than that and if people wind up calling in more than once a week, we have to delete one of the questions. Here we go.

Hi. This is Pat from St. Petersburg, Florida. I have a comment and a question. First comment, I was listening to Nancy Pelosi this week and it was just unbelievable to me. She was talking about possibly doing another round of stimulus and she said they were considering giving us more money as if it were their money they were giving, rather than it would be our money. Anyway. And the question is, I'm starting to get the feeling that maybe we're heading toward a coordinated dollar intervention by all of the central banks. What are your feelings on that, and what do you think the temporary outcome of that would be?

JIM: You know, Pat, so far, one of the big risks with the dollar is the decline from 2001 has been an ordinarily decline. But there is the risk if some tragic event in the US, major financial failures of a money center bank. On the day I'm answering your call, it's Friday and you saw the turbulence in the market regarding the solvency of Fannie and Freddie but if the dollar was to take a precipitous decline, I think at some point, you would get a dollar intervention by central banks. But whether they can just arrest the decline temporarily would be the best outcome that they could achieve. But in the long run, as more of these events start to unfold in the US, more and more central banks are diversifying out of the dollar, so the dollar slowly little by little is losing its status as the world's reserve currency as central banks and OPEC member countries are starting to diversify more and more of their reserves into other currencies and more importantly they are starting to move into gold. [3:17]

Hello Jim and John, it's Daniel from Brazil. I'm a long time listener and I have a question about these new engine of growth, the BRIC countries – my country being one of them. Do you think that the depression that Jim sees by 2010 in the US will affect those BRIC countries a lot, or can these countries be immune to this depression? And secondly, I see the view of you guys that the social aspects of inflation – but I would like to know if you see major transformations of society in the depression or after the depression in the US and the world.

JIM: Daniel, of all of the countries, your country of Brazil has so much going for it. Not only is it a food basket, a major exporter of soy beans, it's also a major exporter of base metals from iron ore; and also you’re self sufficient in energy; you are one of the cheapest producers in the world of ethanol. And on top of that, your major oil company, Petrobras, has made the biggest discoveries in oil probably in the last couple of decades. So I think your country will be one of many that will weather this storm much better than those of us here in the United States. And I do think that the social aspects of inflation are already beginning to change in the United States. You're seeing it in the decline of morals; you're seeing it in one scandal after another either in government or in corporate life, and it's changing the behavior in the country where the country is becoming much more cynical. I mean the approval ratings of Congress is now probably down in the single digits. So this social transformation is taking place and will get much, much worse and more pronounced as things continue to weaken here, but as far as Brazil, your country should remain fairly strong. [5:31]

Hi. This is Jim from Northern California. Guys, I saw a story in the Wall Street Journal this week about a German company that supplies the paper to the government of Zimbabwe, that they use to print money. Under pressure from the German government, this company has stopped shipping paper to Zimbabwe, making it much harder for Zimbabwe to continue with its one million percent inflation rate. I found this article very troubling in light of our own money printing and paper needs. So in order to support Ben Bernanke, as the head of the Fed, I believe it is critical for the United States to establish the Strategic Paper Reserve. This would work much like the strategic oil reserve which is designed to protect the US in the event of emergency oil shortages. We would fill the strategic paper reserve, SPR, with at least a billion tons of paper that the US Treasury could access in the event of a paper embargo on the US. We can't let helicopter Ben be held hostage by foreigners looking to influence the US into forcibly protecting the value of our money. Remember, people, if the paper runs out, that could ground commander Ben's helicopter fleet and we can't let that happen, can we?

JIM: Well, Jim, thank goodness we’ve got a lot of forest in the Pacific Northwest. [6:53]

JOHN: I'm hanging onto my trees, Jim.

JIM: I'm going to start planting and harvesting trees.

JOHN: Hands off my property.

JIM: We just got a new heavy duty Xerox machine, so I'm going to take – yeah, maybe I should stock up paper. We'll just print up our own money.

Dominick from Germany. I've got two questions. First, I recently read a book Collapse from Jared Diamond, a professor from UCLA and the title was Collapse: How Societies Choose to Fail or Succeed. Maybe you could invite him to your show. I think it would be interesting speaking on the theme of peak oil and he also wrote something about mining and the environmental costs of mining in his book. Very interesting. Anyway, you probably have read it already. And the second question would be about naked short selling. Doesn't it end all when the company has to pay dividends, you can't pay dividends to twice the number of shares or can you?

JIM: You know, Dominick, I did read Collapse by Jared Diamond. We tried to get him on the show. It's sometimes very difficult to get professors. They write the book and they are not used to giving book tour and things like that. We tried too get him on the show. It didn't work.

John, do you know the book. Is it Tainter, that also wrote a book about the collapse of societies? Very, very interesting, both of them. Yeah. It's amazing to see some of the parallels between Diamond’s book and how are politicians are not dealing with the issues that are confronting it. Very, very disturbing. [8:20]

Hi Jim, this is Bruce from Minnesota and I was wondering when you could have Jim Rogers on your program again. I'd really be interested to see or hear what he's talking about right now.

JIM: You know, we'll certainly try. Jim is a rather difficult person to get on the program because he's on the other side of the world and he does a lot of traveling, but we'll take that into consideration. [8:51]

Hello, Jim and John, this is Lam calling from Vietnam. Recently, our government has decided to go ahead and stop the importation of gold, in the context that our headline inflation is over 25%, and poor people are having a very difficult time to be able to afford to feed their families. Is it a good decision to make and what will be the impact of this decision on the economy and our life. Thanks for the great education that you have brought. I have recommended your program to a couple of investor friends.

JIM: You know, Lam, I don't think it's a good decision because what they are trying to do is prevent their citizens from taking care of themselves. Maybe the next best thing would be to try to get into some kind of gold mining stocks if they won't let you import gold. It sort of reminds me of the 30s in the US when the US government confiscated gold, but you had the shares of mining companies like Homestake that went up almost seven fold. So, no, I don't believe it's a good decision for your country, but you know, that's what governments do when they are dealing with inflation. It just tells me more inflation is probably coming to the country. [9:52]

Hey guys, this is Luke, formerly from Spain, from Boulder. I had a question for you regarding Royal Gold and the ticker is RGLD. You know, why has Royal Gold – it seems like a very long drawn out triangle for the last year and it really hasn't done very much compared to Goldcorp, and I wanted your opinion on it. Is there something wrong with the company, why hasn't the share price been moving up lock in step with the gold price because I thought they were a royalty derivative play, meaning they would get the revenue based on the gold price? And they just seem to not be moving and I’m wondering what you guys think of that.

JIM: You know, Luke, there could be a number of reasons. I mean the company’s actually doing well. It's revenues have gone up consistently every single year as the price of gold has gone up, its operating income has gone up, its net income has gone up, its earning per shares has gone up, its return on common equity remain fairly constant. Mining companies are kind of funny. You can have, for example when, gold bull market started, Newmont was out performing Barrick. Now you take a look at it, Barrick is out performing Newmont. You’ve got periods where companies languish. There is one reason: It has a huge short position equal to almost 10 percent of the stock, so that's probably what's going on here. [11:20]

Hello, guys, thank you for your wonderful program. This is Jim from Canada right now calling from South Korea. I've been reading Bresciani-Turroni’s book on inflation and he says that some of the greatest beneficiaries of the hyperinflationary era were people with large debts that were inflated away, and I’ve hearing from other experts in a hyperinflationary era, you want to have little debt and you want to be very solvent. And I'm a little confused. I don't know which one to go for, whether I should take advantage of debt or maybe I should be solvent. I don't know.

JIM: You know, Jim, a lot of it depends on your ability to carry debt because in a period of hyperinflation where your wages don't keep up with the cost of living, more and more of your wages, or the income that you will earn, will go towards paying the ordinary costs of goods and services. Listen to the segment that we did in the big picture about the woman who was worth 1.2 million that was struggling and paying her principal. So it all depends on whether you have the ability to carry that debt, so you haven't told me enough about your personal income or your means to carry debt, so I would need a lot more information.

But basically I would say this: If you have lots of income surplus at the end of each month where you have more than enough income to live and can profit from inflation and can tie in debt at a low level, that would be the way that you could profit from it. But on the other hand, if you're borrowing, let's say today, it will probably cost you about 6% or more, you would have to assume the rate of return on your investments would be over 6%. So unless you're very astute at investing and protecting your capital, that becomes a risky proposition. So generally, I don't recommend it. [13:24]

Hello, Jim and John. This is Frank from Youngstown, Ohio. I heard a term bandied about and also in the print media called ‘oil vigilante.’ Who is or what are the oil vigilantes? How do they effect the commodities market? Do they provide a good service or are they somebody that we should oppose? Thank you for the excellent work you guys do.

JIM: Frank, I think when they say oil vigilantes, what they are referring to is every time that the government tries to inflate and also the government intervenes in the gold markets, trying to keep the cost of gold or the price of gold down, the oil vigilantes are basically saying, “look, we're responding to your inflationary attempts, so we're going into the oil market dollars and the rise of oil seems to be a check on government inflation programs.” That's what's meant by oil vigilantes.

[14:15]

Good morning Jim and John. This is Mario calling from Canada. Just a couple of quick questions. First of all I noticed with my bullion dealer that they don't have a lot of stock, but they do have these unrecognized 100 ounce silver bars which they charge a dollar less per ounce than the recognized silver bars. They still have the .999 pure stamp on them and they are from some company, but is there any disadvantage to buying these type of bars over recognized bars? They are cheaper, so they seem to be better, a better deal. And question number two is: When do you perceive that the junior market to start to turn around. I've just been watching this week as the Toronto or the Toronto Venture exchange here in Canada is just being pummeled by all of the selloffs, so are we looking for this to happen a long ways down the road or shortly down the road?

JIM: You know, Mario, I would prefer recognized bars. I think they tend to hold their value. The problem is when you have an unrecognized value you really don't know what real true content of silver is in it and that's why they are discounted. And I would stick with the recognized value. In terms of when the junior market will turn around, I would suggest you go and listen to the segment that we did in the Big Picture with “Cisco versus Gold Corp” that I did with Eric King. [15:48]

Hello, this is Munroe from New York. First of all, I have to congratulate you on the show, it's most excellent. Everyone will agree that these are dire times and only politicians and the mainstream media would deny we’re in a bear market or even a recession now. Everywhere else I read about the US economy being on the verge of a collapse, a crash, a depression or all of the above. Even European entities like Royal Bank of Scotland has issued strong warnings of a US market crash coming very soon. The reasoning should be very obvious to you and your listeners, a weakening dollar, major deficits, peak oil, a credit crisis, restrained consumers, etc. Now, the main question is: Do you think we are indeed heading for a major crash, a series of mini-crashes, or simply an over-extended the bear market? And how soon do you think this will happen? Another question is everyone seems to agree that gold is the best safe haven.

Since these are dire times and they are appear to stay for years to come, in terms of political, economical and social terms, what will be the signal for you to exit your gold position?

JIM: You know, Munro, I think we're probably in for an extended bear market. At some point we will reach a level of which inflation starts to come in and turn up the nominal value of equities, much as it did in Germany, Argentina, Turkey, Russia and other countries that resorted to hyperinflation. The Zimbabwe market is up considerably, but once again, they have one million percent inflation.

In terms of gold, when to exit it? I think when you start seeing your neighbors talking about the fortune they just made in some moose pasture or some non-name gold company that went public and everyone talks about it much the way they did when the public got in-between 1978 and 1980, that will be probably my exit point. [17:56]

This is John from California. There is a loud discussion about a possible crash in the United States dollar. I would like to know what are the most likely scenarios for that to happen?

JIM: You know, that is one of the risks that the Bank for International Settlements stated that the financial situation in the United States is so precarious that who knows what it could be, some unforeseen event that triggers complete lack of confidence. But it would have to take a major event of that magnitude before you would see a complete collapse of the dollar. I don't think we are there yet. I think it's going to take on the mismanagement and policies of our Congress and our political officials before we get to that point. [18:40]

Hello, Jim and John, this is Anderson from Albuquerque, New Mexico calling. My question is in regards to Minefinders. I read in a recent press release about a blockade that caused a delay in production. The people involved had something to do with a Ejido community. Could you please explain the significance of Ejido communities in Mexico to mining companies operating there. And in particular, I'd like to know if another blockade at the Minefinders site is possible and what ramifications it would have on production in the future.

JIM: You know, Anderson, it's just the opposite. Actually it’s the Ejido, which is the local government that supports Mine Finders and is helping the president resolve the situation. What happens in Mexico, the leftist party PRD has an adjoining affiliation with an NGO, non-government authority, and what they usually do is they show up at mine sites as they get ready to go into production, and what they do is they try to disrupt work flow and demand for extortion they ask to be paid off. For example, they showed up at Goldcorp's mine. I think Goldcorp ended up paying them 6,000,000. They've showed up at Gammon. They've shown up at other mines as they go into production. And the problem is, as you know, with the extortion.

And this goes on throughout much of Latin America is it's a way of life and what happens, the problem is once you pay them once, they tend to show up again and Minefinders has chosen to work through the government, to work through the president of the country, to not subject his shareholders to extortion because Mark knows once you paid them once, they will be back again. And they hit up all of the mining companies throughout the area from Goldcorp – I heard stories they were showing up on Pinos Altos, Agnico-Eagle, they've been at Gammon and other sites. It's just a way they use to fund themselves, much as, for example, kidnapping is used as crime funding a lot of these leftist groups in Latin America. This is just one measure that they use to do so. But the Ejido, contrary to what you’ve heard actually supports the mine because the company has spent considerable amounts of capital, they are building up the community. These are good jobs that they are creating there and it is creating prosperity for that community, but the government, not only the national government but the local government prospers from that. [21:08]

Hi Jim and John, this is Ram from USA. Today is Tuesday, July 8th and Bernanke came out and said that he's going to print enough money to bail out all of the banks and the dollar rallied against every other currency. Please explain the conundrum.

JIM: There are a couple of things. Number one, the dollar's decline has a lot to do with economic decline, so anything that looks like it temporarily may cause a balance or relief or take some of the financial stress off of the economy, you get a bit of a rally in the dollar; and also, remember the dollar index, technically you have a lot of currency traders that trade off oversold, over bought indexes, and the dollar had gotten oversold, and so it was time for it to go up. But the bounce didn't last long because at the end of the week we're right back down again. [22:00]

Hi. This is Thomas calling from Perth, Australia with a question. A couple of weeks ago, Jim stated in the Big Picture that he liked what he called the resource-rich currencies, the Aussie dollar in particular. Now, no currency is backed directly by the countries resources and its value is determined by parameters like interest rates, money supply and foreign reserves and the like. This tells me that it's possible for a wealthy country to have a weak currency. Relative to GDP, Australia’s running a large trade deficit and an enormous balance of payment deficit. Add to this the fact that money and credit are being inflated to oblivion, it looks to me very much like a lot of trouble for the Aussie ahead. The mainstream opinion is that the Aussie will continue to gain against the US dollar to parity and beyond, but I have my doubts especially when world interest rates start to catch up. Australia is doing a very good job in the global rates of currency debasement it seems to me. Any comments will be much appreciated thanks a lot.

JIM: If you take a look about resource rich countries, they stand to fare this crisis that we're going through better than others. And as we have always maintained here, all countries are debasing their currency, all are running increases in their money supply figures. In fact, in Australia, your money supply or M3 has grown around 20%, India has grown at 21, Brazil is at 26 and Russia is at 29 and China is at 18%. Yes, you're right, you are debasing your currency, but you have something that the rest of the world wants which is natural resources, and especially your proximity to China and much of Asia which is one of the fastest growing regions in the world. Your currency will depreciate as all paper currencies do, and that's why we recommend gold as the ultimate currency, but you should fare much better and depreciate at a much slower rate than eventually what I think is going to happen here in the United States. [23:57]

Hello Jim and John , this is Steve from Houston. My question: is the commodity selloff on Monday and Tuesday of this week a result of a sector switch by smart money, or is it the result of money moving out of hedge funds at the an end of the quarter and then selling what they can even though this sector is still strong? How can I tell which?

JIM: You know what, Steve, I would say it was more deleveraging in hedge funds liquidation of leverage because as quickly as this came down, look as quickly how it has gone up. And even though the CRB Index, the price of oil is up, I still think that the supplies are so tight – and the one thing I would bring to your attention was, for example, the IEA report that came out on Thursday, that sort of topped off and really helped to elevate the oil market in addition to the geopolitical tensions, and that was that world oil demand was going up. They had upped their forecast by another 80,000 barrels a day just because of the demand that they were seeing coming from the emerging world. And if you look at corn prices, which are up 48% and if you look at soybean prices which are up 36%, we already know with the floods in the Midwest, and over a third of our crop going towards ethanol this year and the late planting of our main grain crop, that we could be facing some shortages. The other thing that relates to weather patterns and things like that are sun spots and the sun spots indicate that we're going to be going through a cooling period, so the markets are so tight now, I still think that the smart money is holding their positions. [25:35]

Hello. This is Chris from Florida. Could you all speak a little bit just sort of in general terms about Potash or fertilizer in general, coal in general and then nuclear and then maybe some Canadian – not specific to Canadian juniors but just maybe the Canadian junior market in relation to these. There have been a lot of little micro caps start up for exploring for especially Potash and coal. Some of them have caught my eye and I just wanted to sort of get a big picture view of where that's going and we hear this, blah, blah, blah, bubble talk about it all of the time too, but I can't see the need for any three of those, going anywhere but up.

JIM: You know, Chris, fertilizer Potash is even being rationed. It's very hard to get it. A lot of the main countries such as Potash Corporation, Agrium, and some of the others are ramping up their Potash production. Very essential for today's agricultural sector, a great place to be. Very tough. You almost have to pick your spots here because you take a look at these stocks this year, they've been screaming. If you look at Potash, it's up, what, about 51 percent this year after doubling last year; Mosaic up 46%. If you look at Agrium up 38%, but you know what, I would pick a point in some kind of correction and then maybe get in. Probably some of the emerging potash companies would probably be a better value at this point, because some of these companies are pretty expensive. In terms of coal and nuclear, that is one area that we are going to be heading towards regardless of a lot of the politicians just saying ‘no’ right now, because when the lights start going out and when we start having more and more crises when it comes to electricity – I mean just think when we start going to electric cars, plug-in hybrids or various other types of cars, the demand that's going to be put on the grid system that this is, I think, a good area to invest in. And times where commodity markets correct themselves are probably good entry points, in my opinion, to get in these markets. [27:39]

Hi. This is Rich from Raleigh. I've been looking at some of these chart that's show that the Federal Reserve has swapped out a large percentage of the treasury bills that they hold for these worthless bank assets and so what happens when they run out of treasury bills to swap out? Is that possible? It seems like they have 800 billion or something like that in reserve or something, and what happens when they swap them all out? Anyway, that's my question.

JIM: You know, Rich, it was interesting because there was a congressman this week that brought up that very same question in the next crisis when you loan out what you have left, do you monetize. And Bernanke squirmed and avoided the question. But that's what happens next. They have to start monetizing. [28:22]

Hello Jim and John, this is John from Pennsylvania. I did go back and listen to some of the old Doug Noland interviews especially after listening to the interview on that book The Trillion Dollar Meltdown and it was really fascinating to relisten to Doug Noland now that we have the hindsight – or at least some hindsight – so I was just wondering if you could have Doug on again, hopefully sometime in the near future.

JIM: You know, Doug, we will. Doug always comes on our program and thanks for reminding me. It's been a while, and Doug has been dead on the structured financial crisis and shadow banking committee. And thanks for reminding me. [29:02]

Hi Jim and John. It's Daniel in the UK. I was wondering what your thoughts were on which economies are in the worse state, over here in the UK or is the US going to be worse off during crisis period. Also, I wanted to buy a book on peak oil, and your list on the website, are they in order of which ones you prefer and which two or three books are your favorites.

JIM: Daniel, gosh, you go to my website, I've got a whole list, but there is a new book that's coming out, actually it's outright now, and one of the co-authors will be on my show and it's a book called Profit from the Peak by Chris Nelder. You can get it on Amazon. It gives you a good, good primer about peak oil and makes the case for it and gives you a balanced approach, even takes a look at those who don't believe in peak and they do a good job of refuting those arguments. But more importantly, it tells you what you can do about it, steps you can talk to protect yourself and how to invest with peak oil, what are some of the upcoming energy technologies. So this new book coming out Profit from the Peak would probably be my recommendation. [30:19]

Hi, Jim and John, this is Andrew from Colorado. My question to you is that is gold ever going to be anything more of a hedge against inflation. I, for example, if I did my weekly shopping now for the equivalent of three grams of gold, well, when in times when the value of gold goes up and the value of my dollars go down, or will I still be doing my shopping for three grams of gold, or will the value of gold go up, some other reason against the prices that I pay for my food, et cetera. And also at a time when everybody is buying gold, let's say sometime in the future when the price of gold has gone up massively, where would you go after that? What investments would you go into once everybody is buying gold?

JIM: You know, Andrew, your gold grams are always going to keep you even with inflation and gold works either way in inflation or deflation. It works in a deflationary environment because the financial system goes under. It works in inflation because it assumes the role of money and it keeps you even in purchasing power. And I would say at the extreme level, it will keep you above the inflation rate because as people begin to panic and bid up the price, very much like what you saw happen between 1978 and 1980 where the price of gold went from, what, 3 and 400 dollars to 850, even though that 850 figure didn't stay there very long; and silver went to 50.

So I would definitely say that it's going to keep you even with inflation. And when would I get out, you know, at some point when fiat currencies collapse – not just the dollar, but I'm talking about the euro and other currencies. They will go –and there is already talk, if you take a look at Benn Steil from the Council on Foreign Relations, others are already talking about gold, some kind of gold currency or gold backing currency. Maybe it's a global currency that's backed by gold. But once fiat currencies are discredited, the only way that you could obtain commerce would be some kind of exchange or monetary system that is backed with real values, and that's where I think gold will move to the forefront. And once that happens at that point, you'd be wanting to get out of gold. [32:39]

Hi. This is Bruce from Houston. My question resolves around Jim Sinclair’s recent notice to either take your shares, hold them physically or become a book entry on the transfer agent's book. Now, my assumption is that this is regarding large pension funds. If I'm personally investing and this is my own IRA or SEPP program, I should be a book entry on the transfer agent’s books as it stands. Would you please give me some input on taking physical possession of the shares. What do you think about the importance of doing that? And then, second, again, I know you've touched on this so many times but confiscation of physical, gold bullion, how likely is that in the future once there becomes a gold backed currency or a precious metals backed currency?

JIM: You know, one of the problems that you may have, Bruce, if you took shares out of the IRA and took possession, I'm not clear on this, so I can't give you any authoritative opinion on it. But it's my understanding that could be considered a distribution from an IRA – and if you're a tax attorney specializing and you have an answer, please email me so we can get that information out on the air. And also in terms of confiscation of gold, you know, if they were to go and remonetize gold, I would suspect that they would go after the ETFs because that's the largest stock pile of gold. And at that point, it may make trading in gold – it would cap the price of gold and it may not be advantageous at that point to hold gold. But I think eventually, that's what they are going to have to do as we enter this age of turbulence as fiat currencies are going through their death knell; and I'm not talking just about the dollar, I'm talking about all fiat currencies. There is already growing talk in the Asia and the Middle East of going to some kind of gold-backed currency, so it's gaining more and more widespread recognition. [34:42]

Hi Jim and John, this is Bob from New Jersey. I'm calling on July 10th, and as the market closes gold is up 1.98%, Goldcorp is up 3.66%, and Agnico-Eagle is up 3.41%. However, Yamana gold is down over 5%. Reading through your June 28th transcript, I know your emphasis is on companies that can increase production and maintain low costs. Looking through Yamana’s second quarter update, it looks like it has accomplished both of these requirements. Since Yamana is a significant percentage of my portfolio, I'm wondering why it's not keeping up. Thanks for a great show and it's the best educational resource I know of.

JIM: You know, Bob, when they announced their second quarter even though year over year their production was up 9 ½%, increased quarter over quarter, they were a little bit less than what market was anticipating and they were – you know, Yamana this year has anticipated, at least what they've told publicly, that Yamana is anticipating that they are going to get a 1.2 million in production, and it looks like they are going to fall short of that. So even though they are increasing their production, their costs are much lower, they are actually negative because of their by-credits that they get from copper, it was less than the market was anticipating given the goals the company set out at the beginning of the year, but I don't know which day you called up. But once again, you know, on Friday, the stock was up almost 7%, so it came bouncing right back. [36:11]

Jim and John, this is Mark from Redondo beach, California. Hey, guys, I just wanted to let you know it's Thursday and as of today, the XAU to gold ratio has closed a total of 33 times under .20 for the year. The XLE to USO ratio has closed at 0.72, a two year low; and OIH to the USO ratio is closed at 1.8, which is also about a two year low. I was wondering if your son, Chris, might do some research to find out where these ratios were back in the 80s in the last gold and oil bull market.

JIM: You know, it's funny that you brought that up because we're working on quite a few things in the gold market and the energy market, one of the things we've been looking at is the regression analysis in terms of those stocks within the major indexes that are more closely correlated to a movement in bullion and then we're also looking at beta – in other words, which stocks move the most when gold moves the most, and then a combination of those two factors coming up with our own sort of index. And I'll make a note here and see if he can look into it. [37:25]

Hola, Jim and John, this is Richard calling from Buenos Aires, Argentina. Jim, many of us are salivating over the prospect of sky high gold prices and I'm wondering if you think this is such a good thing. Don't you think with such high prices many previously uneconomical miners would be going into production and would therefore cause a premature end of the gold bull market as they create an over supply that would force the price down.

JIM: You know, Richard, what it would take to take a mothballed mine, get the permits to begin mining, you're looking at a process that could take three-to-five years out. And if what we're seeing unfold here in the currency markets in this crisis window, we anticipate between 2009 and 2012, you could see gold keep going and listen to the segment in the Big Picture that I did with Eric King on “Cisco versus Goldcorp” because it can tell you sort of our short and long term views in terms of how this market unfolds.

But will old mines that were maybe abandoned when the gold market ended, will some of them be brought back into operation again? Sure. There will be new mining ventures that will be formed to take them over, but once again, this is a process that take a long period of time; and as you're probably well aware, if you look at any exploration company today, if you're a major firm grassroots discovery to taking a mine into production may take 10 years, and so quite honestly, I couldn't tell you where the price is going to be of gold in 2018, so I don't see that as being an issue here. [39:15]

Hello, this is Aaron from Illinois, I just have a comment about platinum and palladium. I work for a heavy construction company and in 2010, we have a Tier-4 emissions coming out where it's going to affect 118 of our models and then by 2015, it's going to affect 180 of the models and we need a special, particular filter which is going to contain platinum and palladium and I think this is a regulation that's going to go over all of the heavy construction equipment companies and lines so, FYI.

JIM: You know, I've heard of that, Aaron, and it's amazing that a time when energy prices are going up, we keep going up with regulations that are just going to drive the price of energy sky high. And it's amazing that, you know, and the same thing that happened when they refined gasoline in terms of sulfur. It is requiring the processing of taking the sulfur out of diesel and regular gasoline that the refineries have to burn and run at higher temperatures, and it's causing them to break down. That's becoming more significant and more frequent because a lot of these refiners are 50 to 70 years. These guys that pass these regulations, they have no concept of cost or what it means their own regulatory actions and that's government. Unfortunately, it's going to keep driving prices higher. [40:41]

Hi. This is Bill calling from Nashville, just wanted to get your take on the refining sector. The sector has been hammered mercilessly and I wonder if a turn around is in sight and kind of what you see for the future.

JIM: You know what, the crack spread has narrowed. Eventually what's going to have to happen, refiners are going to have to start raising prices at the pump or basically they are going to have to start shutting down. I would hold on to refiners, I don't think we have enough of them and if you're willing to take a longer term outlook and especially for those who can refine heavier fuels, we don't have enough refining capacity in this country to refine the gasoline and the finished fuel products that we consume. And it's gotten to the point where other countries are now building refineries. They are going to build one in India. Saudi Arabia is going to build one, and right now the crack spread is as you're probably getting close to a bottom here before this has to improve. If it doesn't, you know, you could have refineries basically start shutting down because they can't operate at a negative. [41:49]

JOHN: Jim, that's it for this week and assuming that most of our listeners don't fall into very deep depression during the course of the coming week, when they come back next week, what will they hear?

JIM: More depression.

JOHN: Good.

JIM: Coming up next week, Thomas Donlan will be my guest. He's written a book called World of Wealth. Richard Ferri, The ETF Book that's coming up on the 26th and we've had – once again if you've been wanting to know a lot of information or gain knowledge on ETFs, stay tuned to that show. We have had him, or requested this interview because we do get a lot of emails, Q-Line calls on ETFs. So Richard Ferri, The ETF Book on the 26th of July. Chris Nelder Profit from the Peak, an excellent book on peak oil on August 2nd. Jeffrey Christian, the CPM Platinum Group Metals Book for 2008 and WD Lyle Jr., PhD and L. Scott Allen A Very Unpleasant Truth. And that’ll be coming up on August 16th.

So on behalf of John Loeffler and myself, we'd like to thank you for tuning into the Financial Sense Newshour. We wish you a pleasant weekend.