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Financial Sense Newshour

The BIG Picture Transcription

July 26, 2008

Part 1

Crosscurrents with Jim & John

It might not fit your definition of what an emergency is, but it fits the definition for the American people; we want you to deploy the strategic petroleum reserve now. We want you to tap into the strategic petroleum reserve to protect the American consumer now.

To say that we would raid the strategic petroleum reserve for three days worth of gasoline is laughable. It’s laughable because the American people understand that what this new Democrat majority is all about is, is having energy prices stay where they are.

President Bush said we’re addicted to oil, and he turns and around and says let’s just get more addicted to oil. I don’t understand why the Republicans then voted against our bill to call for new clean energy sources of electricity so we can electrify our cars and not have to burn oil.

The people didn’t understand. I’ll tell you what they do understand; they know of something very bad about energy; two, they don’t think they’re being told the truth about energy.

JOHN: We’re hearing all this gibber-gabber going on out there in the Congress and elsewhere. We’re hearing that the real estate market has bottomed out, it’s going to turn around and go up; we’re hearing that the financial sector has bottomed out and we’re going to have a stronger second half; the commodity bubble has busted –that’s probably news to you, Jim, I’m sure – gold and silver aren’t worth anything. And the amount of static out there that you’re hearing right now is really keeping the average person totally confused. There’s real static in Congress right now regarding the oil situation. The politicians have done nothing but jump into the water and thrashed about and muddied the entire situation to the point that people can’t really tell where it’s at.

JIM: And it’s not just that they’ve muddied the water on what our situation is in oil, there are other cross-currents that are going on in the market right now. Barron’s ran a front cover story, “the real estate market has bottomed,” and yet I’m just looking at my Bloomberg top stories on this Friday and it said foreclosures doubled in the second quarter, led by California and Nevada and Arizona. You’ve heard people say that this was the bottom of the financial crisis, especially with the bounce in financials that we’ve had. And then you have others who are saying, “look, commodities are going down, so that means this is good for the economy and it’s good for the markets.”

Well, you know, if you follow that logic and talk about oil prices coming down – and remember, we predicted 125; when we hit 125 we predicted 145; we hit 147 and we’re pulling back. And I’ll get to why I think this is just nothing more than a pull-back later on in the show. So what people are saying, “well, oil prices are coming back down.” The reason they’re coming back down is there is demand destruction. All right. Now, let’s assume that that demand destruction is global – which it isn’t, but let’s assume that these guys are right. Well, if we’re seeing global demand destruction it would be as a result of economies slowing down. Now, if the world’s economies are slowing down (which, by the way, they are) and we’re heading into a global recession (which I don’t think we are at this point – at least not in the emerging world) then that means slower economic growth; slower economic growth means slower profits, then sales come down and if sales come then profits come down. On one hand they’re saying, “hey, the price of oil is good, we ought to buy stocks, because with commodities going down that means there’s going to be less inflation and that will be better for the economy, and the economy is going to get stronger.” So they’re trying to have it both ways, John. They’re saying that weaker commodity prices are a result of weaker economic growth, but then on the other hand they’re saying economic growth is going to get stronger. So here is one cross-current where if you follow the logic it just doesn’t stack up. [4:06]

JOHN: It would seem that are two real sources of static that we’re hearing right now. One comes from Congress, the other comes from the administrative branch, coupled with I would say with some of the voices off of Wall Street and the Fed. I think those are the two areas.

JIM: Yeah, on the one hand the Fed is talking about economic weakness, on the other hand the Fed is saying inflation is strong, we’re going to raise interest rates. And I can tell you this, with the banking system as precarious as it is right now, there is no way that they’re going to be raising interest rates right now, especially on the short term because if anything they need a steepened yield curve (meaning that short term rates have to be lower than long term rates) in order for banks to make a profit.

If the yield curve starts to flatten (meaning short term rates start to rise) and rise to the level of almost long term rates, then there is no profit in the yield curve for banks to make money. So it’s a situation that you have today that just doesn’t follow a lot of logic. And what I think they’re trying to do is keep interest rates low because you can take a look at – whether it’s the Term Auction Facility, or whatever the Fed is doing to keep money pumping into the financial sector – whether it’s money center banks, or it’s investment banks, you have to remember that the Fed has exchanged roughly half of its balance sheet of Treasuries for toxic debt from these institutions. And so if anything, they can’t raise interest rates right now unless they would be forced to in a precipitous decline in the dollar. And despite all the things that have been going on in the market which have been favorable over the last week when we saw a lot of the financial sector and discretionary stocks recover, it really didn’t produce much of a bounce in the dollar. I mean, we’ve been between 72 and 73 on the Dollar Index, and that’s been about it. Now the dollar is starting to decline on this Friday as you and I are talking. [6:08]

JOHN: You know one of the things that have been forgotten in the midst of all of this, Jim? it’s a little word called deficit. Do you remember that? What? 24 months ago we heard all this crowing about who was responsible for what deficits. It was part of the rhetoric as the campaign started to heat up and remember all the presidential debates. But we’re proposing, what? A $300 billion bailout for homeowners now; there is another stimulus package in the pipeline. This can’t help the deficit and it surely isn’t going away, but it’s been forgotten in all of the talks so far.

JIM: Well, we have two problems –and this is one of the weaknesses that are weighing on the dollar – is you have the budget deficit. We did a $160 billion, $150 billion stimulus package. And by the way, by the end of next month, most of that money from the stimulus package will have been spent. And so that’s why they’re worried, even with this stimulus package. You know, it gets back to the argument, John, give a person fish, or teach him to fish – and right now we’re giving people the fish. All right, when you’ve finished with the meal then what you have to do is keep feeding them fish. So that’s why they’re talking about another stimulus package as we head into the fall because as this money has been spent and we’ve had a dismal return in terms of retail sales – and if you look at and digest the retail numbers (which my son Chris has done on one of his pieces he’s written on the website) a lot of retail sales – what’s holding up retail sales are three things. A lot more money is being spent at the gasoline station due to higher energy prices; a lot more money is being spent at the grocery store due to higher prices; and then even on the retail sector, a lot of it is being held up by ecommerce – in other words, the Amazons and a lot of retail business that’s done online. But if you look closely into those numbers, a lot of those online retail sales are coming from overseas not from American consumers. So now, as we head into the fall, people are saying, “what’s next, what’s going to hold it up now that the stimulus package and the rebate checks have been spent, what are we going to do next?” And so the government’s budget deficit is getting bigger, our trade deficit (of which nearly 50 percent of our trade deficit is oil). I think what our oil bill this year is going to be somewhere between 650 and 700 billion dollars in terms of imported oil products. So that’s structural. We’re importing 70% of our energy needs – and we’re going to get into that in just a second. And so as America’s deficit grows and gets bigger – whether it’s our trade deficit, which is structural; whether it’s our budget deficit which is structural – there is going to be the demand to finance more dollars. And eventually, all you have to have is foreign central banks, which have been the main purchasers of Treasury debt this year – all you have to do is have them purchase less Treasuries and eventually we’re going to get to the point where we’re going to have to start monetizing debt.

And our listeners probably remember – what was it? A couple of weeks ago – when Bernanke was on Capitol Hill, the one Republican congressman said, “wait a minute, you’ve loaned out half your balance sheet. When the next crisis hits and you loan out the rest of it, what comes next? Monetization?” And that’s exactly what’s going to be coming next. And somewhere next year or in 2010, that’s what the Fed will be forced to do because the budget deficit numbers are going to be so large and the trade deficit are going to be so large that the Fed will have no choice but to monetize debt. [9:46]

JOHN: If we look at just the two remaining candidates for president, whether it’s John McCain or Barack Obama, McCain has a whole series of new spending programs. I think Obama, not only does he has this fund-the-UN bill that’s going on to the floor of the Senate, but he has another trillion dollars in revenue spending. You have to ask: where is this all coming from? It’s like there’s someone who discovers they have a terminal illness and they grab all of their credit cards and they’re just going wild with them.

JIM: It’s absolutely amazing. And there is this assumption that no matter how much money that they plan on spending – and it’s like a drunken sailor – that there are going to be people who will finance the deficit; in other words, the grace of foreigners will just continue to say, “okay, you ‘re spending a lot. Your deficits are getting bigger, but we’ll continue to fund them.” Or they’ll turn to the taxpayer and say, “you know what, our welfare is your welfare, and so therefore we’re going to tax the heck out of you.”

John, I think I sent you a cartoon this week that somebody sent me, and it was an individual and in the first frame he makes a comment, he said, “well, I didn’t buy tech stocks.” And then the next frame is, “I didn’t buy an expensive house that I couldn’t afford.” And then the next frame is, “And I didn’t get a subprime mortgage, I got a fixed rate mortgage.” And then the next frame is he’s reading the papers and on the front of the papers it says “Financial Crisis.” And then the final frame says, “I guess this is going to cost me a lot of money.” [11:12]

JOHN: Well, you’re right about one thing, Jim, in there because you frequently hear politicians, especially Congresspeople talk about the welfare of the budget of the government as if that reflected our welfare. And I keep pointing out, no, they are two different things. I could be doing miserably, you could be doing well. Or vice versa, or either way it doesn’t work out that way. But frequently they merge those two together.

JIM: Yeah. There was a story in the Journal this week that talks about that states are slammed with tax shortfalls as the economy weakens. It looks like almost 46% of – actually, not 46%, it’s a figure that’s much larger, that a lot of these states are running big deficits. But the responsible states are cutting back on spending; in other words, trying to balance their books; “look, hey the tax revenues aren’t coming in, we can’t continue to spend,” because states can’t print money like the federal government. The only difference or exception to one of the states that are being responsible is California which has increased its spending by 44% in the last five years, and in order to balance that budget they want an $8.7 billion tax increase, which we talked about last week.

But it’s amazing when you look at the situation and all these crosscurrents, they’re trying to tell people, “with commodities going down things are really getting better for the economy and we’re going to get a strong second half.” And I just don’t see how you’re going to get a strong second half, as we see these continuing trends. And about the only good thing that is going on right now is exports. So if you look at the economy and you dissect it, what is doing well right now? Well, the oil sector is doing well, so that means the oil states like Alaska, Texas, Oklahoma. What else is doing well? Well, the agricultural sector is doing well. So the Midwest has a strong agricultural presence, that is doing well. What else is doing well besides agriculture and oil? Exports are doing well, especially the export of capital goods; so that is doing well.

What is not doing well is the financial sector and real estate sector and consumer discretionary. So as consumers are pinched with higher inflation rates, higher taxes, they’re having to cut back on discretionary spending so that sector is not doing as well. And what I worry about in this political campaign is starting another trade war and then raising taxes or forcing unionization on a lot of the export sector which is doing well. That’s because one of the things that’s working is a lot of foreign companies are coming to the United States because manufacturing in the United States is starting to become more competitive. So you just cross your fingers and hope and pray that whatever is left that’s working, they don’t mess that up. [14:13]

JOHN: Well, the coin some of the static we’ve been talking about, the SEC was basically protecting the investment banks in the area of naked shorts. So there was a rally, what, two weeks ago in financial stocks I think? And then Barron’s had an article saying that the real estate market had bottomed out and was therefore going to bounce back up again. But the head of the FDIC is offering a counter piece of information.

A lot of people are worried about more banks failing. What do you see ahead?

SHEILA BLAIR: Well, I don’t make predictions. I will say that I think the number of bank failures will go up this year and next, but we’re still operating at very low levels historically. We’ve had five bank failures this year. [14:51]

She doesn’t make predictions, but she’s predicting that the number of bank failures are going to go up.

JIM: Well, you know, this story coming out on Bloomberg on Friday, and it says:

Bank of America and Wells Fargo, the top mortgage lenders, told Congress they have accelerated the pace of loan modifications to avoid foreclosures amid criticism they’re slow to keep people in their homes. Both banks added staff and contacted more homeowners to reduce loan rates, or to arrange repayment plans to cut monthly payments, executives said at the House Financial Services Committee. Bank of America has doubled its modifications in the first half of the year from the second half. Also, they remain committed to customers and their staffing at their banks

And even opening up on weekends, John, because there are a number of institutions that may go under – and several big institutions. And remember, what happens is when people pulling money out of the bank because of the fractional reserve system – for every dollar deposited the bank only keeps 10 cents on reserves - well, when they start losing money, or people start pulling money out of the bank as they did with Indymac the next thing you know is the bank becomes insolvent. So I think what Sheila Blair, the head of the FDIC, was saying is, “Look, we’ve got a hundred more banks on the troubled list.” We know that Indymac is going to take up 20% of their reserves and the FDIC is talking about increasing the premiums that they charge to banks to replenish FDIC. So that’s why it’s very, very important if you are in a bank, and especially with more bank failures on the way, that you have your money in banks that aren’t in a situation where you’re not going to have deposit coverage – especially if you’re over 100,000.

And of course, I relay that story I had that my wife told about at the airport and one of these – I’m not going to mention the institution because it would be irresponsible of me to do that, but this institution is very, very troubled and maybe the next one to go under – and they’re offering high deposit rates. Remember, if you’re getting a high CD rate that is much higher than everybody else, there is a reason. That institution could be having major financial problems, and as a result of those major financial problems they’re offering high rates to make up for their losses and trying to increase their reserves. So there is a reason those high interest rates are there, just like there is a difference between what you would earn on a Treasury bond and a junk bond because the junk bond is less secure, there is less interest rate coverage than a Treasury. So just bear that in mind.

And the important thing about this, John, is everybody thinks the financial situation is over, but I mean there is just a number of things. You’ve got the Treasury Secretary, Paulson, says the troubled banks is a very manageable situation. The reality is as the FDIC is saying, there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. So you have to ask yourself, how many more banks are on the troubled list? You’ve got Washington Mutual, another troubled bank which refused to honor Indymac cashier checks. You’ve got Paulson asking Congress to buy unlimited shares to lend to Fannie and Freddie; and then you’ve got Fed governor William Poole who says Fannie and Freddie – basically the losses make them right now virtually insolvent.

Bank Credit Analyst came out with a piece this week called The Confidence Game, and they talk about for example, Fannie and Freddie and they said how much money will Fannie Mae and Freddie Mac have to raise given their loss. And they had a couple of situations. They had an optimistic scenario which everything goes well; they have a base case scenario; and then they have a pessimistic scenario.

So if you take a look their optimistic scenario – that means in order for the optimistic scenario to play out, housing stops falling, foreclosures start to moderate and everything goes well. In other words, we’ve hit bottom and it’s looking up from this point. Under their optimistic scenario, Fannie and Freddie will probably need to raise another $20.4 billion in 2008 and another $20.4 billion in 2009 to make up for the losses. In other words, in addition to what they’ve already reported, they’re going to lose another 20 ½ billion dollars in both years. Now, that’s the optimistic scenario. And that’s in order that they keep their losses and they raise enough capital to keep their credit rating intact. And the losses as a percent of their capital equal 25% of their capital in 2008 and 2009.

Now you get to their base case scenario and saying, “Well, maybe things haven’t bottomed yet. Foreclosures continue and real estate continues to go down. You know, that’s our base case scenario.” And this is a story that was out on Bloomberg on Friday. It said:

US foreclosure filings more than doubled in the second quarter from a year earlier as falling home prices left borrowers owing more on mortgages than their properties were worth. One in every 171 houses was foreclosed on, and received a default notice or was warned of a pending auction. That was an increase of 121% from a year earlier. And a 14% increase from the first quarter. And that was according to RealtyTrac which issued a statement on almost 740,000 properties which were in some stage of foreclosure, the most since the Irvine, California-based data company began reporting in January of 2005.

Now, let’s go to the base case in Bank Credit Analysts and what happens to Fannie and Freddie. They would have to raise almost 24.3 billion this year, and then 27.2 billion next year. Their losses this year would equal 30 percent of their capital, their losses next year 34% of their capital.

Now, the pessimistic scenario means things continue to worsen, as Bloomberg reported on Friday with foreclosures up nearly 171%. Under their pessimistic scenario, Fannie and Freddie would have to raise 29 billion dollars this year, and 36 billion dollars next year; their losses would equal 36% of their capital this year, and 44% of their capital next year. And that’s where we get into this “hey, this is over, we’ve hit bottom” I think is just absolute nonsense. The Fed is using emergency powers.

There was another study that was done by a well-known economic firm that basically said that losses are going to amount to roughly 1.6 trillion, and that the financial sector –meaning the money center banks, the brokerage firms – are going to have raise somewhere in the neighborhood of 400 billion dollars of capital. John, the private sector doesn’t have that kind of money; and not only that, firms that have put money to recapitalize a lot of these money center banks have lost nearly 50% of their investment. I mean think of the number of sovereign wealth funds that put money in Citi when the stock was up at 30 bucks, and then it got all the way down to 15. Now it’s roughly a little under 19, roughly about $18.70 on this Friday as we speak. But when they were recapitalizing these firms last December, the stock was at 35 when they raised their first tranche of capital; then they recapitalized them in the first quarter when the stock was at 30; where is this money going to come from? In the end, it’s going to come from you and I the taxpayer. So that’s why it’s really important

There was a great article in the Wall Street Journal, it was an editorial and it was called Why No Outrage? And it was written by James Grant of Grant’s Interest Rate Observer. And just talking about all these financial shenanigans, the leverage, the speculation that’s going on, in the end the government is going to bail everybody out, and you and I the taxpayers are going to end up paying for it. [23:23]

JOHN: When we talk about monetization, which you mentioned earlier, or of the taxpayer paying for it, how does that come back to affect taxpayers because I don’t think a lot of people understand the mechanism?

JIM: When it comes to monetization at this point, the government is running big deficits which means they have to go into the capital markets and raise money through Treasuries. Since there aren’t enough buyers of Treasuries, then what it does is the Fed then begins to monetize the debt. In other words, they print money out of thin air, and they begin to buy Treasuries and that’s when you get the next level of inflation where inflation really begins to accelerate at that level. And we’re going to get into this and show you what happens in the next hour when we talk about the wisdom of Mr. Partridge, when Eric King will be joining me for that segment of the program. [24:14]

JOHN: Mr. Partridge?

JIM: Yep. Mr. Partridge.

JOHN: It sounds like the Brady Bunch.

JIM: No. It was a mentor of Jesse Livermore and we’re going to take a chapter out of Reminiscences of a Stock Operator, which is probably one of the best written books about trading, psychology on the markets ever written. Anybody who has experience on Wall Street, I mean this is almost a must-reading that you would have to go through. I would put Reminiscences right up there with Security Analysis, originally written by Benjamin Graham and Professor Dodd. [24:51]

JOHN: You know, one of the other sort of – what do we call them? – dichotomous statements, is we’re being told that inflation is going away. Remember, everybody was complaining about inflation and the results that we’re seeing in things we buy every day, and they’re saying that it’s going down because the fact that the economy is slowing down. But at the same time we’re being told, “no, the economy is going up and that’s why in another quarter we’ll see it looking pretty good in the second half of the year.” This doesn’t make sense. These are two different things. They can’t be doing both at the same time.

JIM: If you look at global inflation rates, they’re rising around the globe and have been since 2006. And right now, globally the inflation rate is around 7%. Obviously in certain parts of the world and especially in those countries that have pegged their currencies to the dollar, because as we export our dollars due to our twin trade deficits in order to maintain that dollar peg, a lot of these countries are having to increase their money printing (in other words, they print more of their own currency to sell their currency and then they buy dollars in order to maintain that peg) and countries such as several of the Gulf State countries, China are experiencing high inflation rates. And contrary to opinion, John, the economy has been slowing down since the first quarter of 2007 and if anything inflation is going to continue to accelerate, so there’s another myth that we’ve put down that a slowing economy is going to bring down inflation rates. Well, folks, we’ve been slowing down now for almost two years and instead of the inflation rate going down, it’s actually accelerating with all of this money printing and credit creation and monetization that’s going on right now.

And so, higher inflation rates are going to be another factor that we’re going to have deal with, and I predict higher inflation rates as we move into the fall, unless magically they come up with some kind of hedonic indexing and change the index. I mean just look at the PPI and the CPI numbers that were reported last week. Year-over-year the Producer Price Index is up over 9% over the last 12 months, and even the headline inflation numbers are up over 5% if you look at that over the last 12 months. So there are a lot of cross currents that are going on that people just aren’t asking the questions. [27:11]

JOHN: We’ve been talking about the static that’s going on out there in the economic markets, there’s current account issues, trade deficit, weakening dollar – but now we also have on top of this the oil crisis. And if we go to what Congress has been saying, you notice that all they’re doing right now is arguing about what should be done, rather than doing something as opposed to someone like T. Boone Pickens who has been proposing a concrete set of directions. And Boone’s basic answer is “you need to do everything.” It’s a matter of this or that, or debate this or that, get moving, is his answer to the whole thing. Maybe we should listen to some of the dialogue this week in Congress.

A majority in the Senate wants America to be self-reliant and to find more American energy. But the Democratic leadership says, “no, we can’t.” To drive down gas prices, we should be opening up the Outer Continental Shelf today. But the Democratic leadership says, “no, we can’t.” To drive down gas prices, we could be lifting the ban on development of the vast oil shale deposits in western states that sit on three times the reserves of Saudi Arabia; the Democratic leadership say, “no, we can’t.” To drive down gas prices, we could have improved incentives for battery-powered electric cars and trucks today. The Democratic leadership says, “no, we can’t.” To drive down gas prices, we could have voted to open untapped American oil today, but the Democratic leadership says, “no, we can’t.” To drive down gas prices, we could have voted today for new clean nuclear technology, but the Democratic leadership says, “no, we can’t.” To drive down gas prices, we could have approved new coal-to-liquid technology today, but the Democratic leadership says, “no, we can’t.”

Nearly 8 in 10 Americans say we should do these things, but the Democratic leadership and their presidential nominee have the same simple response to every one of them, “no, we won’t.”

A dozen Democrats in the Senate say we should consider these things, but the Democratic leadership has the same answer for them: “no, we won’t.” The Democratic leadership just voted to give up on finding a solution to high gas prices. They just voted to give up on trying to find more and to use less. They just voted to give up on our effort to consider serious ideas from both sides of the aisle. They want us to tell the American people that the Senate’s time would be better spent on other things, that it’s time to simply move on.

Well, Republicans have a three-word response for the Democratic leadership: No, we won’t. I just voted to keep the Senate on the most important domestic issue facing our nation. If there is a more important domestic issue facing the country, let’s hear it. Otherwise, let’s get serious and work towards a big solution to this very big problem.

I mentioned yesterday that I received recently a letter from a dialysis center in Kentucky, they were pleading with the Senators to take action now on the high price of gas at the pump. The letter said that some of the rural patients that have to go to this center for treatment three times a week are now foregoing some of their treatment because they can’t afford the gas to get there. And so I ask my friends on the other side of the same simple question I asked them yesterday: If you won’t act now, with dialysis patients cutting back on treatments because of high gas prices, when will you act? What is it going to take?

Now, I know my colleagues across the aisle are stuck between the no-we-can’t position of their presidential candidate and the Democratic leadership; stuck between them on the one side and the guy at the gas pump with smoke coming out of his ears on the other.

But for me, that decision is an easy one. I’m going to be with the guy at the pump. [31:51]

JOHN: Well, I thought this was a very sobering clip. It was the voice of Senate Minority Leader Mitch McConnell because it really summarizes what has been going on, and we’ve been sitting watching C-Span here for the last couple of weeks as these debates have gone on, and so far – and I’d actually said it to a friend of mine, you know – the Democrats are really between a rock and a hard place here because on one side they have the people at the pump having a harder and harder time both with that and with inflation making ends meet. The flip side is they’ve been beholden to a certain degree to what I call irresponsible environmentalism which lacking a certain basis in science at times, and a certain basis in economics at other times. So they’re stuck in between this, trying to maintain the two, saying, “well, we’re committed to working on something that’ll work.” But then as you see here, nothing works except to release the strategic oil supply. And that of course is supposed to be there in case of strategically hard times, where suddenly there is a need for this oil and it’s not available, rather than trying to bring the prices down. So this is what’s been going on in Congress for the last two, three weeks. [32:58]

JIM: And I get back to an article that was written by Michael Cembalest and he’s the chief investment strategist for JP Morgan Chase. And he said, the only thing we’ve done is we passed a bill allowing us to sue OPEC, and we’re now trying to find – as Matt Simmons has – you know, we’ve gone on a witch hunt, we’re trying to blame speculators. And it’s interesting because there’s a report that’s going to be released out in September and I hope to get somebody from the government that we can get on the program and talk about this.

The first thing I’d like to do is see if we can act as a Congress on something that appears Democrats and Republicans agree, that speculation is a problem. It is a serious problem. Is it the only problem? Of course it isn’t. But it is a problem, and we should try and do something about that. [33:51]

JOHN: One of the charges that’s frequently made now, too, and we’re hearing this largely from the Democratic side of the House: speculators are driving up the price of oil. And there are proposals now to try to curb speculation.

JIM: And there was a report that came out this week by the CFTC – the Commodities Futures Trading Commission – and they had a task force and they released a headline on Tuesday, and they said that so far they have found no evidence that investors are systematically pushing up the cost of energy. And behind the CFTC study were a number of government agencies. For example, this task force led by the CFTC include staffers from the Department of Agriculture and Energy because remember, agricultural prices have gone up. So they included them. They included the US Treasury; included the Federal Reserve, the Federal Trade Commission, and the Securities and Exchange Commission. They’re going to release this report in September, and hopefully we can somebody on this show and say look, it is not…

And John, this is the problem that we have with energy. Since 2002, when the price of energy started to go up from $20 a barrel to 30, 50, 70, 90, 100 and then hitting 147, we’ve been looking for scapegoats. “It was the war, it was terrorism, it was the dollar, it was the oil companies.” And now the whipping post is the speculators are causing all this and the CFTC just reported, “no they’re not. We have found absolutely no evidence.” Just as every time the price goes up, they try to bring the oil companies, drag them before and you know, they browbeat them and they look into investigation of price gouging and they have found no evidence on the part of the oil companies. And we’re wasting all of this time on minutiae. Meanwhile we’ve got all of these problems that are going on in the country. And as T. Boone Pickens has talked about, we are now importing 70% of our energy needs; and that figure is going to get bigger and we’re giving 700 billion dollars every year to people overseas and we’re not doing anything.

And we can go back to the reason we need to drill is – number one, we’re never going to drill our way out of this mess. I want to clarify that. T. Boone Pickens has said that as well. That’s because America will never be able to discover enough oil to produce 21 million barrels a day, which is what we consume in this nation. But here’s why we do the drilling. It’s because in the next three to four years, the production in the United States is going to decline by almost one million barrels a day; we’re on about a 5 to 8% decline rate. The second reason is our major suppliers of oil – whether it’s Canada, Saudi Arabia or Mexico – by 2012 we’re going to lose over a million something barrels of oil from Mexico. In fact, Mexico has already cut back its production to the United States by 300,000 barrels. We’ve already seen Venezuela cut back its shipments of oil to the United States between 300,000 and Chavez said that’s going to be decreasing as well. And so what are you going to do? Because, John, one of the arguments they say is don’t drill because well, if you drill it’ll take 10 year. That’s balderdash. Get rid of all the red tape and you can bring supply on within three to five years. And the other answer is, well, if you take the argument that don’t drill because it won’t come onstream for 10 years, well, guess what, folks? The solution, whether it’s going to be plug-in hybrids or electric cars or new nuclear power plants or new refineries to refine sour crude or shale oil, they’re not going to come online for 10 years. So you’ve got to do something, and that’s why we keep talking here. The answer isn’t a, b, c, d. It is ‘all of the above.’ You have to drill, you have to conserve, you’ve got invest in new technology. I mean it’s all these things. And John, we’re doing absolutely nothing, which is amazing and why we’re going to head into that crisis window. [38:03]

JOHN: If we look at your prediction track record here, if you remember in January oil was at 90 and I think you were giving it a prediction of 125 – which it did – and then you raised that to 145 – we’ve gotten as high as 147. But now we’re down to 122, so you know, is this another sign of “it’s over,” or what’s going to happen from here on out?

JIM: No, you’ve got to remember, John, if you look at a chart of oil, after hitting a low of $50 in January of 2007, oil went from $50 all the way to 147. I mean, that was one heck of a move in the price of oil. And nothing goes straight up. You always have pull-backs in any bull market. Just look at a chart of oil from 2001, and you’ll see on the way up there have been pull-backs. And so we could get to – I don’t know, 100, 110, 115 – I don’t know what that is going to be, but that will be the bottom and then I predict you’re going to see what is called a v-spike that as quickly as it hits that number it’s going to spike right up.

And so you know, I’m a firm believer in peak oil and in fact, we’re going to have Matt Simmons here on the program on August 4th; we’ll be interviewing Matt and we’re going to talk about several of his predictions, number one, conventional oil peaked in May of 2005, so I do believe peak oil is here. The difference between conventional oil production and what we consume is coming from two sources: 1) it’s coming from coal-to-liquids, gas-to-liquids and it’s coming from biofuels – that’s what’s making up the difference. And the problem is you know, we’ve had demand destruction of over 300,000 barrels a day in the United States, but Cantarell, Mexico’s largest oil field has lost over 300,000 barrels. You saw Saudi Arabia say that it was going to increase its production of heavy sour crude by 200,000 barrels a day; and then we saw the rebels in Nigeria take an oil platform of light sweet crude production offline of 200,000 barrels a day. So, yes, there is some conservation going on in the US and Europe and elsewhere, but there is also expanding consumption that’s going on in the developing world. [40:23]

JOHN: All right. So if we’re assuming that this 122 is a pull-back, is this another entry point if you want to get in and begin buying again, or should we wait until something falls further?

JIM: You know what I suspect we’re going to see here is the price of oil corrects here, and who knows what that number is finally going to be. Whether it’s 100, 110, 115, you’re going to see the media just go bonkers and they’re going to have a hysterical frenzy talking about “this is it! The bubble has burst.” You remember what they did when oil hit $50 a barrel in January of 2007, and you know, the reporters were out on the streets of New York in golf shirts talking about oil going back down to $30 a barrel; three weeks later they were covered with several feet of snow, the temperatures were back cold again.

So look – here’s what your tell-tale sign is of a bottom. I don’t know when the frenzy begins. Whether it’s 110, 115 or who knows, it’s 100. But when you see everybody in the media – and especially, this will be your tell-tale sign, “the bubble’s burst,” you’ll probably see it in a business magazine; they’ll be going gaga on CNBC. That is going to be a perfect entry point and that’s when you’re going to want to go in and pick as many energy stocks as you can. I don’t care if it’s international oil companies, natural gas companies, service companies because I can tell you this: peak oil is real, you have the International Energy Agency talking about it; they’re studying over 200 oil fields and they’re going to have a report out later on in the fall, and hopefully when that report comes out because they’re saying, “Wait a minute, we’ve made all these assumptions that the supply was going to be there, and the supply hasn’t been there. So we need to take a look at what’s happening to the oil fields.” So, you’re going to get another buying opportunity here to pick up high quality energy stocks. And when that frenzy and that hysteria hits the media, that will be your tell-tale sign it’s time to move aggressively and move in this sector because I can tell you: peak oil is real. It’s here. And it’s going to be time to load up on that because I predict we will be going back up again and then when we do hit this bottom, whatever that number is, it’s going to be a v-shaped bottom and it’s going to be back up again.

And you know, it’s amazing because everybody is saying the bubble is burst, it’s over. You know what folks, Brent crude prices even as low as they are now with this pull-back are still up 33% for the year; West Texas Intermediate crude is up almost 29% for the year. If we take a look at natural gas prices, they’re still up 25% for the year. And this is always the weak season for natural gas typically as we are building up our natural gas supplies. We begin doing that in April and we do that all the way up to October and then you get into November and the winter months and you start your drawdowns. And even though we’ve seen some pull-back in the ags, you’ve got corn prices still up 22% - and remember, the supply and the planting was delayed and you still have soybean prices up 19%. So this is another time frame where you’re going to have the chance to load up again. [43:33]

JOHN: So the bottom line of the whole segment that we’ve done here, Jim, is it’s very important to learn how to separate the real information from the static, the wheat from the chaff, but in the case of what we're talking about here, this is another buying opportunity.

JIM: Absolutely. And you’re going to have a great chance here to load up on – whether it’s gold stocks, agricultural stocks, infrastructure stocks or energy stocks, or even water stocks. All of this stuff is going to be available at a great price and just simply add to your position. [44:00]

JOHN: Coming up next we’re going to be listening to an interesting interview with Alan Newman as part of our Other Voices series. You’re listening to the Financial Sense Newshour at www.financialsense.com.

Other Voices: Alan M. Newman, Editor of Crosscurrents, "Metamorphosis Redux"

JIM: Well, last week Christopher Cox announced that shortselling of financial stocks would be limited. There would be curbs put in place – although some of those curbs were reversed for market makers and option writers. It’s said, and some have written and criticized the SEC for its take: Why are they protecting the financial industry and not others? Some have said, the SEC exists not to serve the public but to serve the financial industry.

Well, one of those critics joining us on the program this week is Alan Newman. He’s editor of the monthly publication called Crosscurrents. Alan, welcome to the show. I want to get into your newsletter and your opening statement where you said the SEC exists not to serve the public, but to serve the financial industry.

ALAN NEWMAN: Yes, and what’s happening is we’re just driving individuals away from the market. I expect that’s what’s going to happen in the long run. People are just going to walk away because the markets can’t be trusted. It’s all for institutions – in particular, hedge funds – and the hell with individuals, to hell with the individual investor. [45:32]

JIM: He cites here the Forbes September 19th article, where JP Morgan, Citigroup, Daiwa, Goldman, and Credit Suisse were fined 1.3 million for Reg SHO violations but they never forced them to cover.

ALAN: First of all, 1.3 million dollars – it’s not even a slap on the hand. It’s nothing for these companies. It’s laughable that they fine them these piddling little amounts. [45:55]

JIM: Did you see Friday where they reversed it for the options writers and the market makers?

ALAN: Yes I did. I put it into the newsletter. Let me tell you something. We started publishing in May of 1990. We called the market top two months later and we began selecting short recommendations for the newsletter. So we’ve been doing this for many years. And it took a long time for me to see what was going on. I think the crux of the problem is that share capitalization is just totally untrustable at this point. The simplest way to describe what’s going on is just for the sake of argument let’s presume that there is only one share of stock available in, I don’t know, XYZ Corp, it doesn’t matter. And I own this stock on margin. I’m the only one who owns it so the company that I have the shares with can lend them out to somebody. They’re short. Well, there’s going to be a buyer on the other side of that short sale transaction, and in essence what has happened now is that there are two owners of that one share of stock. One of us – me – has what is known as a share entitlement. The other one has the real share. But, you know, this chain can go on and on and on; and theoretically, I don’t see any limits on the number of shares to be shorted. It’s not only the shares that are sold naked and not ever delivered, it’s short sales in general. If you take any of the companies on the New York with large short interests, every share short represents an additional share owned by someone out there. [47:32]

JIM: Well, you know, you made a comment in your newsletter that I found just astounding. And it’s one of every 17 shares in the S&P now has more than owner.

ALAN: That’s right.

JIM: I mean this is incredible. But here’s the one that really got me and you quote here, Alan, you’re talking about the Russell 2000: iShares ETF, IWM, and they have a 150- let’s just round it off, 151 million units outstanding; and yet customers own 304.2 million.

ALAN: Right.

JIM: And then I thought, wow, how can you do that? And then you quote the iShares Dow Jones US Real Estate Index, IYR, has 22.3 million shares outstanding for the Trust, and yet the New York Stock Exchange counts 66.6 billion short.

ALAN: That’s right. I know it’s difficult to believe, but those are the actual numbers – the actual shares outstanding I got from ETFConnect.com, which is a good source of information and the shares short I believe I got from the New York Exchange short interest list. And those numbers are published every month. I don’t know exactly why we had that particular situation with those two ETFs; and there were several other where short interest is way up there. It probably has something to do with derivatives; it probably has something to do with program trading; I don’t know quite what to make of it but I don’t like it because I don’t understand it. But certainly when I see large short interests with individual companies, I understand that and I don’t believe that [they] are dealing the market any good.

We have an environment now where we’re putting shortsellers on a pedestal. We’re elevating them. And everybody is saying, particular in the media, “well, they’re good for the market.” I don’t think so. Even if you take a case like Enron. Sooner or later it didn’t matter, Enron was going to go down. It was going to go down big time. The problems they had were going to be exposed and people were going to lose money. It didn’t matter that shortsellers were enabled to go in there and possibly naked short the stock down as far as they did. This whole thing where, “well, shortsellers are good for the market because they show us when things are wrong.” Well, they also have a vested interest in making their case if they’re wrong on a particular issue. It’s the same way you had some companies during the height of the mania who were pushing their companies a little too hard and perhaps embellishing their prospects. You have the same going on on the short side with people who have a vested interest in knocking down the price of a stock. They may not be entirely accurate. They may in fact be fibbing. So this whole argument that shortselling is good for the market is, in so far as my opinion, a crock. I do understand that there is a need to kind of oil the market, to kind of grease them at times, in volatile times, and there has to be a buyer or seller of last resort.

But what we’ve had in recent years – if you take a look at New York Exchange short interest, which we’ve – 4 billion shares at the peak in March 2000, and it’s now over 18 billion shares. What has happened now is that you can’t short often. The stock is not available to borrow, so you go out there and you buy puts. All well and good, except now what the seller of the put – the market maker who is selling you the put – what does he do because he has an exposure now? Very often he goes out, and like the SEC exemption affords that, he sells the stock short. He doesn’t even have to borrow it. He is in effect creating phantom shares.

And I’ll give you another scenario that’s even worse. I mean this stuff just ticks me off so much. You have a scenario where hedge funds come in – a shortseller – a typical shortseller – and they really, really want to short XYZ. They can’t get their hands on enough shares. They can’t borrow them anywhere. So they go to the market maker and say, “well, I want to buy a few thousand puts because you know, I really feel this thing is going down.” And the market maker says, “well, wait a second, I can sell you the puts, but how the heck am I going to hedge my exposure? I’ll tell you what. I will sell you the puts and I’m also going to short the shares back to you. You’re going to be long the shares.”

And just so for the sake of argument let’s assume you have a hedge fund that is now the owner of 5,000 puts of XYZ. They also own 500,000 shares of XYZ. (the put is good for 100 shares). Okay. Now, because there was no uptick rule they can short the heck out of the stock. They just keep on selling and it’s -- then the market goes down and down and down. And then what do they do, they exercise their puts and make the money they were going to make in the first place. It’s just a disgusting situation. [52:48]

JIM: You made a comment in your newsletter and there was a lot of criticism when Chris Cox came out last week and said, “we’re going to curb shortselling in the financials.” The Wall Street Journal criticized them for protecting the very firms that were doing the short selling. In your newsletter, you said the SEC exists not to serve the public but to serve the financial industry. And the King Report basically said the same thing. So there’s a lot of criticism.

And Alan, there’s a bigger picture here. If you take a look at what happened in the tech bubble, we had the scandals with the investment banks where they were selling these companies that had no possibility of ever surviving to the public; internally they were saying it was basically crap. And so we had that scandal. Then we had the accounting scandal with Enron and the accountants. Fast forward three or four years later and now we’re having the credit bubble crisis where all this garbage debt was repackaged – sold as triple A, so you couldn’t trust the credit rating agencies. And now you have the government – in this case, the SEC – protecting naked shortselling. I mean there is something that has got to give here. And one of them is going to be the market. In other words, capitalism in its present form – we don’t have free markets and capitalism when this kind of crime goes on and it’s unchecked. [54:16]

ALAN: This situation is far worse than any of the others that we’ve mentioned. So far as the tech bubble and the mania, these things are going to happen once in a lifetime anyway. You’re going to have people marching into markets and they’ll be buying penny stocks, who will be buying crap because they feel that’s where the quick buck is. With the crisis – what I call the crisis – that we have now with shorting, this is the capital formation system. The stock market is the capital formation system. Yes, money can be raised privately, but more often than not it is raised publicly in the market place.

And let me just give you another for instance, but use our popular XYZ company. The company has got three million shares outstanding, they would like to raise some money by selling another million shares into the market. The trouble is there is already a short position of a million shares, and we know that there is another million shares out there that’s owned by someone, so you actually have shares owned to a total of 4 million shares. And maybe now they don’t have the demand to sell that extra million shares that they wanted to. And possibly that money was going to be used to expand a business and hire new people, create new jobs. So we’re putting ourselves in just a terrible, terrible pickle. And what you said before, the King Report. I echo this as significantly and dramatically as I can. The SEC, it’s doing everything for the exchanges and for the brokers and the dealers because anything that helps their business is supposedly good for the markets. But it is not. We are driving people away. They’re finding less and less to trust about the US markets. [55:58]

JIM: You know, I had Wes Christian on the show a couple of weeks ago –it was about a month ago – I was doing the Crime of the Century is what I’m calling this – and he was telling me that if these Wall Street firms and hedge funds were forced to cover, it would take almost a national bailout. In other words, they would have to raise $200 billion, $300 billion –and that figures keeps getting bigger by the day – in terms of some kind of bond offering that would be payable over time, or maybe it’s a taxpayer bailout where these short positions would have to be covered because the reason I’ve been told – and he told this story – and this is one of the reasons why I think that the fact that the brokerage firms own the DTC – he was talking about one company where they went to the brokerage firm and the client accounts – the clients own 12 million shares of this particular company, but when they went to the DTC that brokerage firm only had one million shares at the DTC. Who was it? Senator Bennett talked about this on the floor of the Senate. [57:06]

ALAN: Yeah, first talking about Overstock; right?

JIM: Yeah, and he was also talking about let’s say that you’ve got 13 days – I think is it – for an FTD (failure to deliver). Okay. So let’s say on day 12 I’m brokerage firm ABC. I’m about ready to report a FTD. What I do is I call up one of my buddies and that buddy gives me the million shares that I’m naked short, so I don’t report it.

ALAN: Right. It just goes from one to the other, to the other, to the other, to the other. That’s like an endless loop.

JIM: Yeah, they just keep this endlessly circulated within the DTC. And as long as they never have to show it – and what Christian, and what others have pointed out actually what we see as reported short positions are much greater when you take a look at what’s being floated around internally within the system.

ALAN: Yes. The number is virtually unknowable because the DTCC is about as opaque as any institution on the entire face of the planet. It’s funny that you should mention because I had done a lot of work before, looking at what’s happening to Overstock. They were on the SEC’s threshold list, which is companies which have more than 2% of their shares – half percent of their shares – naked shorted. They were on that list for about two years, I believe, when in reality this is all supposed to be settled within 13 days. Now, how it can be right to keep a company on the threshold list for that period of time is just beyond me. I don’t know how if there’s any investor – of course, particularly those who own Overstock.com, it just – it can’t be. If the trades are supposed to be settled –and the trades are supposed to be settled within the regulated amounts of time – and they simply cannot be on the threshold list for two years. It just does not make any sense.

I’m acutely aware of what’s been going on with Overstock. I’ve been following that for a long period of time. In fact, before that I was following NovaStar Financial for a long time. What happened there was very, very peculiar. Forget the business. I mean this is not important. What’s important to understand is how the mechanics of this situation work because they can decimate very good companies. It doesn’t have to be something like NovaStar Financial that got absolutely creamed in the mortgage crisis. But you had people who were getting very big dividends from the company, and they were parlaying it by buying shares with those dividends and lending them out on purpose to the brokers so that someone else could short the shares. And they were getting paid a fee for lending them out. At one point it was 8% annualized, at one point I think as much as 15% annualized. So you had people who owned the shares and they were lending them out for a fee and someone would come along and short them and knock down the price of the stock. So again, the system was being beat by the shortsellers.

I do think that there’s a purpose for short selling. I do think that short selling is legitimate, but I think the system the way we have – the way it has been constructed to this point is broken and it is in dramatic need of a fix. We have over 18 million shares short now – the short interest figures just came out on the NYSE. It’s the largest ever by a wide margin as usual. It’s just skyrocketing every month and more short sales we see, the lower the market is going to go in the long run. And the more share capitalization can’t be trusted, the more investors are just going to walk away. [1:00:44]

JIM: The thing that has surprised me is you have this whole set of institutions called hedge funds that sort of operate outside the parameters – in other words, if you were a mutual fund company you couldn’t do in many ways what the hedge funds are doing.

ALAN: No. Not at all.

JIM: No. And every time, Alan, they try to go in and regulate these guys – didn’t they try to regulate them for a month and that was overturned very quickly.

ALAN: I don’t remember, but I certainly would not be surprised. There’s just too much money and too much lobby and too much influence involved there.

JIM: This reminds me of – do you remember the stories of the 1929 crash. Very similar hedge funds – they didn’t call them hedge funds –

ALAN: Short pools.

JIM: But they were short selling pools run by it was rumored Kennedy, Baruch, Jesse Livermore – and that’s where the name “watered stock” or “papered stock” came in because what they were doing is exactly what these guys are doing here. I mean, don’t we run the risk of something similar happening if these guys are allowed to do this unchecked?

ALAN: Sure. And fortunately there is a flip side of the coin. The fellow who owns Studs Bearcat, he was fighting shorts in his stock. And what he wound up doing was continuing to lend out his own shares. And he kept on allowing his shares to be bought and bought, until finally shorts owned more stock than there was outstanding. And in those days, you could call it back in. So he called it back in and the exchange went nuts because they were boxed, unless they found a way to make a deal with this fellow. And they eventually did. He let them out for some insane price per share. They had to buy it back. So I do think something like that could happen in the future. And that’s one of the areas where we do have systemic risk, but we do face that possibility where – we’re seeing it already where stocks like Fannie Mae and Freddie Mac have just been decimated in no time at all. And I do think that was certainly one of the things that did in Bear Stearns. [1:02:56]

JIM: Did you see the Vanity Fair article calling it the greatest financial crime.

ALAN: No, actually I did not.

JIM: Well, the June issue of Vanity Fair implied in the article that when Bear Stearns went under, there were three hedge funds that had breakfast celebrating, that it was orchestrated.

ALAN: Sure.

JIM: You know, here’s another issue that I think that also needs to be raised: If I’m a shortseller and I feed information to the cable channels, and the cable channels run with the rumor mill that I place out there – for example, the rumor that was placed on Monday with Bear Stearns that one large institution was pulling or didn’t want execute through them – imagine the impact that that has; or if a congressman goes out and says that a bank is insolvent and you start a run. I mean, what about rumor mills? I mean, isn’t this all part of the system too?

ALAN: Oh it’s absolutely part of the process. I think David Faber did no one a favor by citing his concerns with Bear Stearns in mentioning a source. In a situation like that, where the news – I should say, the “rumor” – is you can’t not know that that is going to have an enormous impact. In a situation like that, I don’t see how a journalist cannot mention his source. Now, if he doesn’t have a source that can publicly reveal the reasons why he feels that way, then that source should not be mentioned, the rumors should not be mentioned because it’s not newsworthy. And in the same fashion, I think Schumer did the country a disservice by mentioning anything about Indy bank that could have gotten them out. If there was any possibility of it getting out, he should have just kept this hush-hush, discussed it with whoever he was supposed to discuss it with. These things have enormous implications, and you just have to be very, very careful. [1:04:52]

JIM: Obviously, you cannot continuously short, as you mentioned, the Dow Jones or the Real Estate Index that has a 3 ½ times short position. At some point you reach a limit, do you not, Alan? I mean what’s the limit? Is it 5 times the amount of outstanding stock. Here’s the issue I think we’re going to be facing at some point in the next 12 to 18 months, which is systemic risk. At some point, it will get so bad that the regulators will have to come in, and when some of these people have to come clean, they’re going to be wiped out. I mean –

ALAN: Yes.

JIM: The firm will not have the capital to buy the stock. I mean let’s take an example that Wes Christian used on our program. Let’s say a company has 60 million shares outstanding and he said they got wind at a shareholder meeting, 80 million shares of votes were cast in company that only has 60 million shares. And when they looked into the issue there was like 40 million shares sold naked. So now you have a situation where the shortsellers have sold 40 million shares they don’t have. Alan, how can you even cover that position because in order for them to cover, they’re going to have to convince 40 million of the legitimate 60 million shareholders to give them their stock back. And you know what happens when you start buying back a stock in the open market; the stock starts going up, you bring in the momentum players that jump on board, they start driving it higher, then you get the shareholders are saying, “oh my goodness, my stock has doubled. I’m really excited. Why should I sell it?” So you almost get into a position, how do you cover? [1:06:33]

ALAN: Well, the answer your question is doesn’t have to happen. Just for sake of argument, take a company that can be driven down to pennies per share, it’s essentially out of business. Like one of the most famous naked shorting cases, which was Sedona Corp., I believe they were in Pennsylvania; it used to be known as Scangraphics. If it’s now a penny stock and it’s essentially out of business –and it just trades because it’s a shell – the shorts are never going to be repurchased. They’ll just trade for ever and what’s even worse is those who were short big time the shares, since they never have to cover, they don’t have a taxable event. So they made their money essentially tax free. It sounds crazy, but that’s the way it works.

There is an impetus here for the big shortsellers to drive the stocks they are short to zero, or not even to zero but to pennies per share where they’re essentially out of business but that they still trade so that they don’t have to cover. [1:07:28]

JIM: So they basically keep it on life support so they never have to –

ALAN: It’s not even life support. I don’t believe that Sedona has any operations any more. I’m not sure but you know, it’s a corporate shell and it still trades and thereby the shortsellers don’t have to cover. I believe if it goes to zero they have to record it as a taxable event. But if it’s still trading they don’t. They go long against the box. And just for the sake of argument they have shorted the shares at $20 each, and they keep the short position intact and they go long against the box – they open an equal size long position somewhere at 2 cents per share – the $20 minus 2 cents is their profit and it’s not a taxable event. So they keep their profits. [1:08:11]

JIM: So basically, what we’re saying – the way this system works right now, if you’re a hedge fund or an investment bank and you do this, crime pays.

ALAN: Er, well, let’s say crime pays if they’ve gone about it in an unethical or criminal fashion We can’t know that for sure, but there are assumptions that you can make about some shortsellers, that it’s in their vested interest to kind of stretch the truth or kind of grease the way down because let’s face it, there’s a lot of money at stake. And it’s the same way the longs did it on the upside in the mania. Not everybody is ethical, not everybody is truthful, not everybody is a good guy. We can’t indict all shortsellers. Some of them are very good guys. I have subscribers who are shortsellers, who I’m positive are very good guys. But there are people out there who have, I’m sure, taken advantage of the system and thereby cost people a lot of money. I see this scenario being repeated countless times, and I see it being repeated countless times to come unless we find a way to repair what is broken. I don’t know what the answers are, but we do need to take note of what is going on and fix the system so that it can’t keep on happening. By the way, in answer to one of the questions you had a few minutes ago, I don’t believe there’s any theoretical limit on the number of shares that can be shorted. If a company has 10 million shares outstanding it might be that we can have a hundred million short. I don’t know. But I do know that there are situations where shorted shares get reshorted and then reshorted and then reshorted. [1:09:53]

JIM: I guess maybe when you look at this and you see this series of scandals – and I think the naked short selling is probably the biggest crime I’ve ever seen committed in our financial markets – what does it say about our regulators that rather than trying to fix the problem, they seem more interested in protecting those who are guilty of committing such crimes?

ALAN: Maybe some of them realize that the system is that broken. If you take a look at the list of SEC attorneys who went on to become a part of broker-dealer firms, you wonder what the heck is going on. Are these people looking for you or I or the public, or are they looking out for the firms? The hedge funds and institutions that want to continue the process in place now have a tremendous amount of clout; and Emma from Idaho, who owns a few shares of this or that, does not.

I am baffled why mutual funds have not been screaming bloody murder because they’re the ones in the long run that are going to be impacted the most. We have so much money tied up in mutual funds. Last count, as of May 31st, 6.3 trillion dollars are in mutual funds. There are 4821 mutual funds; six years ago there were about the same number. You take a look at ETF growth, which is like 50% a year, mutual funds are not growing at all. It’s just been going sideways. And over 6.3 trillion – that’s a significant part of our total stock market capitalization and these people are saying squat, they’re saying nothing. It’s like they don’t care. And their shareholders are the ones that are getting killed by the short selling mechanic and the short selling process of the States. It’s got to be fixed. [1:11:44]

JIM: Well, I’ll tell you, if they don’t fix it, you’re going to see – whether it’s you know, think Enron scandals, the tech scandals, now the credit rating scandals, the naked short selling. You know, Alan, so much of this, if it happens on a continuous basis, people just don’t trust the system.

ALAN: The scenario you brought up before where everybody has to cover and the world’s going out of business because of that, I really don’t even think that’s going to happen. It’s just too far-fetched. I don’t think the system is going to allow a systemic breakdown. I think changes will be made over the next few years. I’m crossing my fingers hoping we’re smart enough. If we don’t, I really don’t know how this plays out. I do think there will be some type of cataclysm and I’ve been talking about derivatives for years, and a lot of this has to do with derivatives now because I’m talking about put options. I mentioned a process before whereby you can’t legitimately short the shares of some company because they’re just not borrowable, and you go to the market maker and you buy thousands of puts, but lo and behold, he can short the shares because he’s allowed to. That type of a situation I think is the one that is going to do us in, where it just becomes brutally apparent as with what happened to Bear Stearns, Fannie Mae and Freddie Mac, that we can’t allow this thing to continue. Either the shares are there to borrow or they’re not. And if they’re there to borrow, they’ve got to be there on a very limited basis.

This is funny because now that I’m saying I don’t have a solution I do have a solution. And again, the solution is if the shares can’t be borrowed, they can’t be borrowed, you can’t short the shares. The same with the market maker. If there is going to be a demand on the long side to drive up the price of the shares, then there should be a demand on the long side and the price of the shares could go up. We’ve had similar situations in the past where a stock goes from 10 to 20 overnight because there’s a tremendous demand. Fine. The same thing on the downside. If the shares cannot be borrowed, someone is going to sell them if there’s lousy news; if it’s found out that whatever company we’re talking about, XYZ, is going to go bankrupt in a week the shares are going to go down no matter what. People are going to be selling at any price to get out. But if you can’t borrow the shares, then they shouldn’t be shorted. This whole argument that shortsellers have a price discovery I think is bogus. If there’s more demand than supply, prices will go up. If there’s more supply than demand, prices will go down. It’s simple enough – it’s plain and simple economics. Shortsellers don’t aid price discovery, anymore than longs do. [1:14:24]

JIM: You get back to the argument that shortselling is good because if somebody sells a stock short, the argument where it creates liquidity is eventually the shares get down to a point where they have to go into the market and buy those shares back and so you’ve got some of the upside. But if you never have to buy them back where you can just continuously naked short then that system breaks down.

Alan, if our listeners would like to find out about the work that you do and your newsletter, why don’t you tell them how they could find out.

ALAN: Well, they can go to www.cross-currents.net – not ‘.com’ but ‘.net’ and they can take a look at some broad samples of our work. If they want to send me an email at alan@cross-currents.net (don’t forget the hyphen between “cross-currents”) I’ll be very happy to send them a free trial.

JIM: Well, Alan, thanks so much for joining us on the program at such short notice, you do great work and keep it up.

ALAN: Jim, thank you. May I return the compliments. I’ve always loved your work and I look forward to seeing more.

Part 2

The Wisdom of Old Mr. Partridge with Eric King

JOHN:Oh boy, what a fiasco. Welcome back to the second part of the Financial Sense Newshour Big Picture. In this part of the show I am going to back completely out of this, and our guest for this hour of the program is Eric King with Jim. The disclaimer is: John Loeffler is totally not responsible for anything that happens in the next hour of the program! I’m going out for Mexican. I’ll see you guys when I get back. Try not to wreck the show while I’m gone; okay?

JIM: Okay. Well, welcome everyone. Eric King joins me in our discussion today. Eric is out here meeting with a group of his investors and I said, “Eric, you know what, with the pull-back in gold, why don’t you join me on the program. I got a lot of emails this week, people getting a little nervous with the pull-back in oil.”

And Eric, there was a saying that you have that you have quoted from Jesse Livermore in his book Reminiscences of a Stock Operator. And I want to begin our discussion here with a chapter in this book, and we’re calling this segment, The Wisdom of Old Mr. Partridge. And I’ve got a copy. Let me see. This is the illustrated edition. It’s a special collector’s edition of Reminiscences of a Stock Operator which was sort of a chronicle of the wisdom of Jesse Livermore, his education in the stock market. I’m going to take just a bit of a moment – and bear with me folks, because I think there are so many pearls of wisdom in what I’m about to read because it summarizes in essence everything Livermore had learned through his experiences in the market that made him the legend that he became in the market. And this is the heading of the chapter, it’s called The Wisdom of Old Mr. Partridge. And it goes like this:

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist, and had always proven expensive to him as it was to me. I think it was a long step forward in my trading education when I realized at last that when Old Mr. Partridge kept on telling the other customers, “Well, you know, this is a bull market,” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements. That is, not in reading the tape, but in sizing up the entire market and its trend.

And right here, let me say one thing. After spending many years on Wall Street and after making and losing millions of dollars, I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight. It is no trick at all to be right on the market. You can always find lots of early bulls in a bull market and early bears in a bear market. I’ve known many men who are right at exactly the right time and began buying or selling stocks when prices were at the very level which should show the greatest profit, and their experience invariably matched my own, that is, they made no real money out of it. Men who can be both right and sit tight are uncommon. [3:40]

I found it one of the hardest things to learn because it is only after a stock operator has firmly grasped this that he can make the big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance. The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he hoped it would do. That is why so many on Wall Street who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The big game did not beat them. They beat themselves because though they had the brains they couldn’t sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligence and patience to sit tight. [4:43]

And you know, Eric, there are so many pearls of wisdom there. I just thought we ought to begin that discussion today because that is the hardest thing to do.

ERIC KING: You know it’s a great section of the book. And there’s a portion in there where – and this was not a guy – if I’m not mistaken, I’m trying to remember – it’s been a while since I read this – it was a section in there where basically – this was not a guy to take stock tips but he had taken one from this young kid and he was long this stock and it starts going up and the kid says, “well, why don’t you go ahead, you’re 5 point, 10 points – take your money off the table.” And he say, “No, it’s a bull market.” Which is that standard answer right, “but it’s a bull market.” Which is such a great line. And this goes on over and over again and finally gets to the point where it’s up 20, then 30, then 40. Now the kid says, “I can’t sleep, I can’t eat, come on. I just feel personally responsible for all of this.” But, you know, he got it. It was a bull market. He had established his position and he just wanted to hold. So you know something, Jim, it is one of the hardest things for investors to do, is to wait and sit tight when they are already correctly positioned. [5:42]

JIM: It really is. It ain’t easy, Eric. There’s noise out there. People saying we’re in a bull market for commodities; people are saying it’s a bubble, it’s burst, we’re in a bear market for stocks. And I mean you have a million people analyzing charts every day and there’s a lot of noise out there and that’s why I think it’s so easy to be talked out of your positions even when you’ve made the correct assessment. Sometimes even though you’re correct on the long term trend – you know from reading charts, Eric, there are going to be some pull-backs along the way and then all of a sudden the noise comes in. And how many times have you seen this over and over again, is Livermore was learning that he had been talked out of his positions, or given back a lot of profit – and I think that’s the wisdom that he was getting from this Old Mr. Partridge. [6:26]

ERIC: Well, Jim, I remember when we were meeting with Keith Barron and Patrick at the San Francisco Gold Show back in 2004. Patrick was so excited, he falls through the Aurelian booth, backwards through the booth directly behind it. They had just had their drill results come out. The stock was on the move, your firm had done a financing at 2 ¼ Canadian with them. But why don’t you talk about what happened to the stock after that because your investors to make the big money they had to be patient and sit tight through some tough times; didn’t they, Jim?

JIM: You know what was the remarkable thing about that – this was back in early 2004, the junior market was on fire, gold was on fire, we were approaching over $400 an ounce and we believed a lot in the project and believed a lot in the management. And we financed the company at 2 ¼ and at first things went really well. I think the stock got up to like 265, things were looking good. And then you remember in the spring of 2004 there was a story that hit the press that Chinese growth rate was slowing down, therefore with China’s growth rate slowing down, there was going to be less demand for commodities. The gold market went through its correction, the gold stocks went through a correction and it really – from that point forward I think Aurelian had got up to about 2.65 and we’re talking about the stock on a pre-split basis. But I can tell you, by the end of the year, we had gone from 2.65, by the end of the year we were underwater in that stock. But you know, despite the fact that the company had money, it was spending money on drills and it was doing all the right things, the stock went down. [8:05]

ERIC: It got a lot worse from there; didn’t it, Jim?

JIM: Oh! talk about getting a lot worse. The following year despite excellent drill results the company had its first resource estimate – now, this was 2005 and the stock ended up below a buck by the end of the year. In fact, the entire year of 2005 it didn’t matter what Aurelian did, investors were dumping it, the investment bankers were dumping it, and the stock really cratered when you think about less 12 months ago the stock was at 2.65. By the end of 2005 it was roughly just under a dollar. So it was really looking like things were going bad. And you know, Eric, it didn’t end there. It actually got much worse because in the beginning of 2006 the stock actually dropped down to roughly about 40 cents – and then of course in March of that year they announced their discovery in Fruta del Norte and the stock began its historic ascent. And it eventually went from a low pre-split of 40 cents to $40. But remember, for almost greater than two years the stock virtually did nothing. [9:13]

ERIC: For the investors out there who are listening, Jim, because you and I will hold, but what gives you the confidence in a situation like that to hold on because a lot of people are going to go through that –and they’re going through that right now in the gold market – finding themselves in investments that are going down with seemingly no end in sight. What can you say to help them endure that without selling? [9:33]

JIM: First of all you’ve got to do your research. You’ve got to believe in the project and you’ve got to believe in the people running the company. And despite the fact that the stock is going down, as long as you’re seeing results on the ground. And we’re using Aurelian because they got a takeout offer this week. But a lot of times, people will be in these juniors and they’re saying, “My God, I can’t believe it.” They announced a preliminary economic analysis of the project, they increased the resources, the drill results look promising and the stock goes down. And it has nothing to do – and sometimes, as you know Eric, you can be in these downturns for 12 to 18 months just simply because investors are focusing elsewhere. They were in the blue chip stocks, the large cap stocks, the large cap resource stocks, or they were in the, let’s say, base metals stocks and so a lot of times you would go through these underperformance periods. By the way, I think that is changing and we're going to get to that in just a minute. [10:25]

ERIC: Well, you know, despite the fact that Aurelian was doing well there was a setback with Aurelian this year. One of the people in the government wanted to end mining or greatly alter the companies ability to operate in Ecuador. You had to hang in there again, and I remember that. The stock fell into the 3s. I bought some as a trade and ended up flipping out of it, but, Jim, you had to sit through some more pain on that one; didn’t you?

JIM: That’s probably one of the hardest things – and that’s why it goes back to sometimes what that Livermore quote of “sitting tight,” but you know, there’s one thing that I think you have to have faith in and that is if you believe this is a gold bull market and you believe gold prices are heading higher – and this goes back to the wisdom that Mr. Partridge gave Mr. Livermore – the big money is not in these individual fluctuations. I mean I don’t need to tell anybody listening to this program, pick up a chart of gold, pick up a chart of oil and just look back over the last seven years – it has nothing to do with reading the tape, but it gets down to sizing up the market and then this trend. Are we in a primary trend? Yes. Have we had corrections along the way? Yes. And if you go back to 2001, I don’t care if you take a look at oil, you look at natural gas, you look at gold, you look at silver, you look at the CRB Index and it’s going up at a 45 degree angle – and periodically we do go through corrections. Nothing goes straight up. [11:51]

ERIC: Well, you know, Jim, I try to pick a couple of themes for individual investors to keep in mind as I’ve done this show, and I’ve talked for years about that speech that Alan – you hear me bring this up all the time – but Alan Greenspan’s over in Belgium and he talks about creating money without limit because the taxpayers would bail out the banks because of their derivative bets, and we’re seeing that begin to happen as we speak. We saw Bear Stearns derivatives get bailed out. Now we’re seeing the bailout of reckless lending of homeowners who got in over their head.

But you know, Jim, the new theme is from George Soros that I’m going to go with, going forward. He talked about the dollar heading much lower over time, but the key quote I will mention each show from now on – and the way I mentioned for years about the Greenspan speech in Belgium which is coming to fruition – the quote from Soros is – so he’s talking about the dollar going down, but he says, quote: There is no suitable alternative. End quote. And Jim, if you understand that one short phrase and the implications going forward for both the gold and silver markets, then investors buying quality gold and silver shares should have nothing to worry about long term because investors on a global basis are going to flock to gold and silver en masse which will create a tidal wave tsunami-type mania which maybe unparalleled in the history of the gold and silver sectors. We saw a 50-fold increase in investors in gold from 76 to 80 and we could be looking at something greater than that on a global basis going forward. This is why when we go back to the wisdom of Mr. Partridge and that lesson of Jesse Livermore is that sitting is so hard – this is one of those times, Jim. [13:29]

JIM: I want to come back to that lessons from Mr. Partridge because he mentions there are a lot of smart guys on Wall Street – you’ve got guys with CFAs, you’ve got guys with PhDs and the problem that they have, because there is so much noise, they never hold their positions; and that’s what defeats them because they never got along or they don’t ride the primary trend. And here’s a quote, I want to go back to Reminiscences of a Stock Operator and this is from the chapter with Mr. Partridge:

That is why so many men on Wall Street, who are not at all in the sucker class, not even in the third grade, lose money. The game did not beat them. They beat themselves. Though they had brains, they could not sit tight. Old Turkey was dead right in the doing and saying what he did. He had not only the courage of his convictions but more importantly the patience to sit tight. [14:22]

And I think that’s the problem, Eric. There are a gazillion people following charts, you have cable channels, you have newspapers, you have magazines, you have newsletters – everybody – there is a lot of noise and I think that’s one of the problems with let’s say technology today and telecommunications – there is so much of it out there that it’s very hard to separate out the wheat from the chaff. [14:46]

ERIC: You know, one comment on that before we go any further is that when you looked at Jesse Livermore’s operation, I mean nobody was allowed to speak. He had one guy in the office and he would work the ticker and he would basically put the trades up on the tape. He had a phone line where he could call but nobody would call him. But this was a situation where he tuned out the noise. Nobody was allowed to disturb him from his thinking. And I think one of the hardest things to do for investors is learn to control your emotions. And this is one of the things that defeats investors.

You know, you kind of tell a story about a time where you blow it or you made a bad move, and here’s a great one where I made a mistake. I took a position in a company. I had a price target on the stock based on my initial entry point and looking at their cash flow models and where I thought they were going to head. And my timing turned out to be dead on because the stock just took off. After I established the bulk of my position and when the market makers would pull back the stock in price, I would just hammer them for more shares because I knew the stock was in a bull move.

And to make a long story short. I was up $550,000 in three months. The stock had passed my target price but I became tuned into the noise. I began to convince myself that this stock was going much higher and I only sold 16 ½% of my position at the highs. And there’s a firm that will remain nameless, but it’s a short selling firm – they had a big position in this company – and the guy who runs the firm was actually running all over on Barron’s and CNBC talking about this company and where it was headed. Well, meanwhile – and I was in touch with these guys – meanwhile they were dumping all of their shares. And I should have clued in because I couldn’t reach this person – “well, he’s traveling.” Well, he didn’t want to get on the phone with me because like me he was selling. They sold about 40% of their position. But I knew the stock market was going to go into a long, rough patch and I held on anyway because I got tuned into the noise. And the stock tanked. And I waited for a bounce and I sold with only what I had left – a $275,000 gain on that bounce. I will tell you, Jim, it never pays to stray from your discipline, in my opinion. And that time it cost me, even though I made a nice profit in the end, in a short period of time. And maybe you can relate to something like that? [16:58]

JIM: Oh yeah! Well, I guess if we’re going to get into true confessions here, you know, probably one of the brightest things I ever did, and probably one of the dumbest things I ever did is I was buying tech stocks back in 1992; and I bought in 1992 – and remember, I come from sort of the value school – the tech stocks were incredibly cheap back in 1991, 92. You could have bought stocks like Intel under 10 times earnings; Dell under 10 times earnings. I bought a lot of the leaders in these stocks and the unfortunate thing that happened is as we got closer to 1995, towards the end of 1995 a lot of these stocks were selling at 30, 40 times PE ratios – things that I had never seen before and something that I didn’t understand then that I learned from my mentors since, all bull markets have three phases. The initial phase when the smart money gets in; the second phase when the institutions get in; and then the third phase when the individual public comes in. And in 1995, as Greenspan had bought interest rates down after the Peso crisis, he began to pump the money supply and the stock market took off and the public came in full scale from 1995 to 2000; nearly 95% of the money that ever came into mutual funds came in between that five-year period. And what I did is I sold my position in tech stocks and then watched with horror the next two years as those tech stocks went up. And fortunately I got back in in 1997, but it was a very, very painful lesson. And that’s what I learned is that when the public gets in that is the third and the final phase and that’s when you hold and start to distribute your position. And I can tell you, and Eric – well, I don’t need to tell you – but the public is not in this investment despite seven years of gains. They may own an oil stock – and I don’t even think the institutions looking at some of the portfolios...they may have a Newmont, maybe they have a Barrick in their portfolio but, heck, I don’t even think the institutions have even fully grasped this. And if they are, they might be trading. I mean name me one institution in the US that has a significant weighting in gold other than a sector fund. I don’t think you can find that. [19:16]

ERIC: I don’t think you can either. And you would have to isolate on the US side because we do have Sprott out of Canada with a heavy weighting. But you’re right, Jim. You’re absolutely right. And you go back to 1980 and it was 40% of the S&P were these resource stocks, and here we are today and there just is not the weighting in gold at all; but we’re going to see, as we go through this mania. But Jim, if you look at the gold based on the Commitment of Traders and I was talking to Ted Butler about this, you can have gold correct further and maybe can breach the 900 level, maybe hit 880 is possible, but to the professionals that’s just noise. Because, remember, the theme of the show is to establish your position and hold through the bull market so that noise should not concern investors, but unfortunately it does. In this pull-back the weak hands are supposed to sell to the strong hands, and I think in a way this show is a friend to the wealthy, but also the average investor because it helps them to hold their positions and stay strong. And this reminds in that same chapter in Reminiscences about sitting tight. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are most the expensive eighths in the world. They have cost investors in aggregate enough millions of dollars to build a concrete highway across the continent. So even though gold may correct another 5%, it may not, so don’t try to be so clever as to miss the big picture. And Jim, why don’t we just lay out the big picture because sometimes investors miss that when they get nervous or they get caught up in the noise. [20:47]

JIM: We’re going to get talk about a number of factors here, but the one I want to begin, the first factor –and this relates to the dollar – and that’s let’s look at our current account deficit. The US trade deficit is running somewhere between 5 or 6 percent of GDP, so we’re transferring abroad between 700 and 800 billion dollars a year. And the important thing to understand about this is, yes, it’s come down from 7% of GDP down to 6. But, our trade deficit is structural because over half of that trade deficit comes from importing oil. We are literally sending 700 billion dollars a year to foreign oil producers and that figure is growing each year. A lot of listeners to this program have probably seen T. Boone Pickens’ commercial. Back in 1973 we were importing 24% of our energy; by the year 2000 or 1991 I think it was something like 40%; today it’s 70%. So we’re sending this 700 billion and that figure is going to get larger. But the more important thing is we’re doing nothing to mitigate that problem. So as we shift dollars overseas to those countries such as China, or to the Gulf states that peg their currencies to the US dollar what they’re having to do is print more of their own currencies, to sell their currency and then buy dollars to keep this dollar peg. So as a result printing extra dollars to maintain that dollar peg, these countries are experiencing high single, or even in many cases double-digit inflation rates – eventually, they’re going to drop their dollar peg or they’re going to revalue their currencies. And when that happens – and I expect that to happen with the next 12 months as these inflation rates rise – but when they begin to revalue their currencies the dollar is going to head much lower – and I think that is going to be a catalyst for gold to skyrocket. And since this current account deficit is structural, it’s something that cannot be solved overnight. We’re not going to solve this tomorrow. We’re not going to solve it next year. We’re not going to solve it by 2010. So when it comes to energy we’re doing absolutely nothing. As our production declines, as our ability to import oil from our main suppliers also declines, our dependence is going to go up, our trade deficit is going to get bigger which gets me to the second problem which is inflation. [23:10]

ERIC: This is from Warren Buffett’s 2006 Annual Report to Shareholders:

Foreigners now earn more on their US investments, than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And like everyone who gets in hock, the US will now experience reverse compounding as we pay ever increasing amounts of interest on interest. No matter how rich you are borrowing on top of borrowing is not a great long term financial plan. I believe that at some point in the future US workers and voters will find this annual tribute –

He’s talking about the interest –

– so onerous that there will be a severe political backlash. How that will play out in our markets is impossible to predict but to expect a soft landing seems like wishful thinking. The US faces a challenge to reestablish its economic credentials. Without drastic and radical action, America’s ability to continue to borrow from foreign investors to meet its financing requirements is likely to become increasingly difficult.

And Jim, we were out the other night and we were celebrating one of your sons’ birthdays and on this subject of inflation and one of your birthday cards was the year he was born and it had some interesting statistics on it – even though your son was born in 78, we have the three years of their birthdays. And I would to read some of the inflation information contained in them. Let’s take a walk back in time to 1977. We have the price of a new house at $49,319 – you move one year later to 1978, it’s $54,749. But just a few years later, by 1981 it was $78,220. So you had the price of a new house literally go up like 60 percent in a matter of four years. And when you look at the price of a new car, it went from $4785 in 1977 – just a year later it was $5405; and by 81, $7718. So we’re seeing that happen today; aren’t we, Jim? We have gasoline going back to 1978 was 63 cents a gallon, and then just a few years later by 81 it was a buck and a quarter a gallon. So you look at even things like tuition to Harvard University – okay, let’s use that for a minute - $4100 a year goes to 4450 in 78, then to 6000 in 1981. So we could break this down into foods and some of these other things, but I think the bottom line here is you look at these types of inflations when they occur and I think the situation in the United States is so much more dire today than it was in the 70s; don’t you, Jim? [26:00]

JIM: Absolutely. I mean you take a look at the increase in the money supply – whether you’re looking at M3; if you take a look at the deficit figures as a percent of GDP; if you look at our outstanding debt; and even scarier than that – and Laurence Kotlikoff has talked about in his book The Coming Generational Storm – where he talks about our unfunded liabilities, our 54 trillion dollars and yet you’ve got a proposal here – it’s a Senate bill – where they’re proposing that the United States takes one percent of its GDP and distributes it to the rest of the world to resolve poverty. I mean, where are we getting this money and yet we have the national debt going up by 800 billion dollars a year. Official debt. And remember, one of the things that Congress does today is they took a lot of stuff off budget. Well, you know, that’s like what we’ve seen with financial companies that took their debt off budget. It’s still there. So the US national debt is increasing by almost one trillion dollars and we’re talking about spending money we don’t have. [27:01]

ERIC: Well, that’s the second factor. So we have going for gold here is inflation. And I didn’t mean to steal your thunder, but I thought those were interesting numbers from days gone by. When you look at this kind of massive inflation that is engulfing the middle class in the United States – even though this is global, the US is facing the double-whammy of inflation coupled with a depreciating dollar so it is much more damaging to us. (Unless you happen to live in, say, Zimbabwe because things are a little more out of control there, right, but not much.) But with this type of massive inflation in the United States, people with savings – and you talk about the wealthy, the middle class – but the people with savings are really trying now to figure out a way to protect themselves. And they will eventually stumble upon gold and silver.

Let’s move on to another factor that is bullish for gold which is our current credit crisis where Greenspan promised we stand ready to create money without limit. And this is from Warren Buffett – and I’m going to stray off a little bit here, but billionaire investor Warren Buffett says he’s concerned about stagflation. This was when he was over in Europe and he talked about the fact that we’re in the middle of this stagflation and it’s not going to end next week, next month or maybe not even next year. And he expects the deflation part to get worse and the ‘stag’ part also to get worse. He also renewed his criticism of derivatives trading. “It’s not right,” he said, “that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets – even though the sectors are actually in good health.” And he complained about the lack of effective controls. “That’s the problem,
”, he said, “You can’t steer it, you can’t regulate it anymore. You can’t get the genie back in the bottle.” Now, that’s Buffett speaking. But let me just say that a promise was made to global bankers and a disclosure was made by Greenspan in Belgium (which I read your listeners for years, Jim) that the US taxpayer will pay for everything, and the Fed stands ready to create money without limit. So that means you’re savings of a lifetime can be wiped out in the blink of an eye. People are talking about deflation right now, at the time when the bills and the promises that Alan Greenspan and the Fed made to create money without limit are here. And they’re here now. It’s no accident that the bailout for Fannie and Freddie passed, Jim. The time is upon us to create money without limit. And people better be protecting themselves. So here we go with the money printing; right, Jim? [29:34]

JIM: The helicopter drop is on the way. We’ve got a 300 billion dollar package to bailout homeowners. You know what’s interesting that I find about this, Eric, is when this credit crisis – it actually erupted back in February, there was a brief six period and then they thought the crisis had been solved, but then it erupted again in August. And the initial estimates, when it first came out in September is that it was going to take 200 billion dollars in losses. By October those estimates moved to 400 billion; by the end of the year they moved to one trillion. And as we saw, every single quarter the banks kept writing off tens of billions of dollars. Now the current estimate is 1.6 trillion and it ain’t over. And that little head fake rally that we’ve seen here in the last two weeks was nothing more than there’s a lot more damage coming to the financial sector. Currently, the estimates that these financial companies are going to have to raise over 400 billion dollars to replenish their capital over the next couple of years. And quite honestly that is way too much money for the private sector to absorb. So let me – I just want to give you an example. Let’s forget about the Wall Street banks for a minute, let’s forget about the money center banks and let me just get you to Fannie and Freddie – and this comes from a recent edition by Bank Credit Analyst, it was their bond strategy. And what they had, Eric, is they laid out three scenarios: one was an optimistic scenario; one was a pessimistic scenario – (so you had both extremes, things go really bad or things get really good); and they had their base case scenario. Now, let me take their base case scenario. Under the this, the housing market continues to deteriorate – foreclosures continue to go up. And it was amazing because on this Friday foreclosures in the United States in the second quarter were up like 171 percent. But in their base case scenario, Fannie and Freddie lose about 24 billion dollars, which is equal to about 30 percent of their capital. And then in 2009, since there is a carry over effect into the following year, they lose 27 billion dollars; and that is equal to almost 34 percent of their capital. Now, that is their base case.

Now, let’s look at their optimistic scenario. Under their optimistic scenario they lose a little over 20 ½ billion this year, which is 25 percent of their capital. They lose 20.4 billion, which is 25 percent of their capital. Okay. That’s the optimistic scenario. Under that scenario, housing stops going down; people start making their payments; there are no more foreclosures. You know, how likely is that?

Now, let me get to the pessimistic scenario. Under the pessimistic scenario, they lose close to 30 billion dollars this year equal to 36% of their capital, and next year they lose 36 billion dollars equal to 44% of their capital. So, you know, Eric, this is just Fannie and Freddie. And then we had the FDIC saying there are 90 to 100 banks that are on the troubled list; and remember, Indymac wasn’t even on the troubled list until a month before it went under. So a lot of people are saying, you know, you’ve seen it in Barron’s, the financial crisis is over. We’re only about 25% of our way through this process.

When you take a look at these losses, whether it’s Fannie, whether it’s Freddie, whether it’s another couple hundred banks going under, whether it’s bailing out homeowners, the 300 billion dollar package that’s about to get passed by Congress, whether it’s bailing out the investment banks – Eric, there isn’t enough money in the private sector. I mean look at the losses that the sovereign funds which have put in capital beginning last year, you know, they’re down almost 50% on their investments. So in the end, like as always turns out, the American taxpayer is going to have to pay a high price and will ultimately end up picking up the ultimate tab. We’ve seen the Fed and the Treasury swap treasury debt for toxic debt; the Fed has loaned out half its balance sheet, and it’s loaning out more; we’ve seen the Fed and the Treasury bail out Bear Stearns; we’ve seen regulatory agency come to the rescue and protect financial firms from shortselling; Congress is now ready to bail out subprime lenders and homeowners with a 300 billion dollar bailout package – and there are going to be many, many more to follow. They’re already talking about another rebate program, another stimulus program. And we’re not even talking about the number of banks that are going to go under and the replenishment of FDIC. [34:20]

ERIC: Well, all of this adds up to the fact that we’re going to be facing a dollar crisis. And for that matter a general currency crisis, since all currencies are deflating against the gold and silver. The warning here when people look back and they will have missed it, is that we’ve had the dollar break that multi-decade, say, 40 year support, in that 80 area. It’s really breached it. And when I was interviewing James Dines in New York and I asked him about the dollar – and he did believe the dollar was going to go to zero, I believe – but also we really have this global money printing you were talking about, Jim – we have this almost competitive currency devaluations where everybody is printing massive amounts of money. And it’s who can outdo the other guy. And then people who peg into the dollar are having to do that. And when you take a look at that and you take a look at the fact that, as Dines said, “it’s money that’s all fiat, that’s backed by nothing.” That is why when you look at this gold and silver bull market it could very well turn out to be staggering. And the one that took place from 1970 to 84 –we had gold go up 25-fold – and that’s stagflation –where we had silver go up 38-fold – that could pale in comparison to what we see here. So I think what’s really important for investors to understand is that gold and silver are reasserting their role as real money. All currencies are fiat. As they deflate against gold and silver it’s important for investors to get protection against that devaluation. The only real way to protect yourself is to own physical metals such as gold or precious metals equities which can give you the upside leverage.

And I want to read something here from Jim Rogers. And this is important because Rogers is one of those people who are legendary, and he used to work with Soros over there at the Quantum fund. So investors, this is from Rogers. But investors should avoid the dollar, while commodities are “the best investment” for this year. Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel, and gold a thousand dollars an ounce, made the comments in a speech in Shanghai. And listen to this. Avoid the dollar at all costs, to quote Jimmy Rogers. I’ll read that again. Avoid the dollar, quote, at all costs, end-quote, Rogers said. The best investments in 2008 are commodities and natural resources; agricultural prices have much higher to go over the next decade. We have a real shortage of everything, including seeds.

And this is from Faber – Dr. Marc Faber – and I want to bring this in Jim, because I think there’s some confusion sometimes out there when they talk about the noise, and the US press is so famous for being selective and sort of manipulating what people say. But I want to read this a little bit because it’s going to clarify a little bit what Dr. Faber is saying because he does believe a correction in oil can happen but he’s telling people to buy gold now. So let’s read from this:

“I think there’s a good chance that the Fed itself will fail one day if they say, ‘We are not going to let you fail.’ And the government will have to bail out the entire system,” Faber said. “If I’m a bad businessman and I go out of business, who’s going to help me?” he said. “But Bear Stearns and the Wall Street elite because they are tied in to the Treasury and the Federal Reserve and they have lunch together – it’s a club and so forth – and they’re bailed out. It’s a joke.” He also went on to say, “I think a lot of banks are already bankrupt, but they hide their rotten assets in categories where you don’t really need to value them,” Faber said. “I think the financial sector by and large have much larger problems than is perceived by the investment community, and the stock market to some extent is telling me that. Investors should go into gold, as its price did not rise as fast as that of other commodities, while the central banks keep printing money,” Faber said.

So right there he says it: Buy Gold. It didn’t go up as fast. And so as we get this commodities correction, it doesn’t necessarily mean that gold will correct very much. He also blamed the central bank for forcing investors to abandon safe deposits for riskier strategies by keeping rates so low. “The Federal Reserve is the greatest speculator. They force people to speculate,” he said. The world economy is sending signals of a major slow down and demand for commodities apart from gold is likely to subside in the second half of the year,” he said. So, I just think people – we talk about the noise and they talk about a correction in commodities and this correction in oil, and sure, Faber says oil could correct to 100 – and maybe it will and maybe it won’t, but the bottom line here is that gold did not react with the rest of commodities. It didn’t really go up that much. So when you look at the stagflation in the 70s when we had gold up 25-fold, it’s barely done a little more than a triple on its way to a quadruple if it’s at $1000. Silver up 38-fold is barely over triple, maybe quadruple. So there is a big bull market in front of us, Jim. And people just need to tune out the noise. [39:42]

JIM: Well, that’s where I want to move next because I want to talk about gold investing. And a lot of investors have been a little discouraged, but if you look at a chart of gold, it bottomed this year right around the beginning of May where it got down to the 855 range, shot up right into – bottomed right around May 1st, shot right up into the 930 – had a pull-back – got down to roughly – what did we get here? – about 869, 870 in June – and then rocketed all the way up to close to 988. We’ve had a pull-back, but you know something, if you look at a chart, it’s still higher than it was the month before. And so Eric, contrary to opinion, people are saying, “well, you know, you get the doldrums during the summer. The price of gold goes down.” It’s not doing that. It’s holding strong. It’s gaining.

And I thought maybe what we’ll do now is we’ve been talking about the fundamental factors, why we think gold is going higher. Why don’t we get into the mining sector and talk about what we see as values there. [40:51]

ERIC: I think, as you said though, Jim, that also gets into noise. You’re going to have CNBC pounding the table every time we’re getting these types of gold corrections. I tell you. By watching them you’d never know there was a bull market happening. But anyway, the bottom line is, yes, we are higher. I think people need to look at this from a big picture perspective because that’s how the big money views this. They’re not as worried about the fluctuations in things, they just want to know where is the trend and where is stuff heading. And Jim, as you know, and I don’t have to tell you, the United States is being asked by some of its creditors – some of its people now – to pay bills in gold. You’re having people who are very wealthy around the world, billionaires, people in these sovereign situations who are basically taking dollars and immediately trading them in for gold. So as this manipulation is happening, as we’re seeing gold say get up to 1000 and they’re trying not to let it take off, they’re having to empty the western vaults of gold; aren’t they, Jim?

JIM: Not only are they selling gold, but you have to wonder about the wisdom of it. I was interviewing Jeff Christian on Thursday, Eric. He’s seeing record buying of bullion like he’s never seen it before. In fact, this will probably be the seventh consecutive year. We know, for example, when it comes to silver that the US Mint is running behind. They sold more silver eagles in the first quarter than they did the entire year of 2007.

And I want to go back to something – this is sort of the theme of this hour, and that’s the wisdom of Mr. Partridge, and once again, this is a line from the chapter of the Wisdom of Mr. Partridge, Reminiscences of a Stock Operator,and I think it’s very important here when you’re describing this bull market. And this is a quote:

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that that bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.

And how true that is. And one of the things I want to get into now. We’ve been talking and laying out the case fundamentally –the big picture – for the long term trend of gold. What I want to do now is get into gold investing. And one of the things that struck me, Eric, is watching this market unfold, and especially in the gold market. We have been in the gold market in 1993, got into gold stocks and then 1994 gave back most of the gains. And one of the things that I’ve learned from my Austrian friends is the outlet for money can go into financial assets, not just the real economy. But one of the things that developed in the late 90s, as we were going through that bear market in commodities, now going into its second decade, it was very difficult to stay alive as a gold producer. So what you saw were these huge consolidations in the gold industry. Gold companies went under. You had the big guys gobble the smaller guys and you had these big giant elephants that emerged at the end of the decade. And at the beginning of this decade, you saw the Newmonts, the Barricks and all that we saw happen is these big companies got even bigger. But here’s the difficulty: there was a geologist, a guy by the name of Ralph Bullis who did a study of all the world’s major [gold] deposits in the world, gold deposits that were in production, gold deposits that were permitting to go into production, and then gold deposits that were in development. And it was amazing. You can count the big giant gold deposits like an Aurelian – you can almost count them on less than two hands. And then as you work your way from the giant gold deposits and you got down to 5 million ounce deposits, you could count those on probably less than two hands. And then you got down to 2 and 3 million ounces deposits and even they were fewer.

So one of the problems I see in this market – one of the reasons I guess I’m more favorably disposed towards intermediate or up-and-coming producers, or late stage development is you’re going to see with difficulty a lot of these major producers having trouble to replace their reserves. And I don’t care if you’re looking at Newmont, if you’re looking at Gold Fields, if you’re looking at Harmony, whether you’re looking at Barrick – all of their production has been coming down. So that’s the first thing. Just like the giant oil companies, they’re not replacing; and the number of world class projects that are out there – 2, 3 million, 4 million or 5 million ounce deposit, there just aren’t that many. And you know, the thing that I find almost remarkable is if you look at the HUI which is up over 10-fold since 2001, if you look at the price of gold which is up 4-fold since then, if you look at the price of silver which is up almost 6-fold since then – you are seeing juniors today –and we talked about this a couple of weeks ago – but you can buy these juniors for 25, 30 dollars to 50 dollars an ounce in the ground. And one of the predictions I made this year is you are going to see this year beginning a wave of deposits and takeovers. All the world class deposits are going to begin to be taken over. Earlier in this year we saw a three way merger with Metallica; we’ve seen Agnico-Eagle make nearly a $100 million in investments in two juniors – [46:26]

ERIC: Very quietly, I might add.

JIM: Yeah, very quietly. Under the radar screen. We saw this week Kinross take out Aurelian, and then on Friday, Pan American Silver said that they were going to be making a late stage acquisition by the end of the year. So the Pac-man theory is taking place, and I think a lot of the majors, the intermediate producers are saying, “how can I grow my deposit if I want to get bigger?” And you’re seeing the other companies are saying, “you know what, it’s cheaper to buy gold in the ground than it is to go out and make a new discovery.” [47:00]

ERIC: You know, I have to give you credit actually, Jim, because you’ve got to go back even further than that. You wrote something called Gold and Silver Train Wreck – it was so many years ago I don’t even remember. Do you even remember when you wrote that, what year was that?

JIM: Oh, gosh, what? 2002.

ERIC: About six years ago sounds about right. But it was a great article. It talked about this. It was ahead of its time. You had grasped this concept. Everything you were just talking about, you were writing about that many, many years ago. And I remember when we were in San Francisco and you know, people like stories so I’ll tell one here – but we were up there and I told you it reminded me of what I call the Pacman phase that I saw going on in technology. And we did some articles together, we talked about this a little bit. You could take the Pacman phase I was talking about from technology and you could drop it right in here in the gold sector, it goes right into the Gold and Silver Train Wreck you were talking about.

And we were there and I remember we ended up in a conversation with Frank Giustra that his guys set up. (And we kind of laughed a little bit because we didn’t even know what we were meeting him for. But we got – which was funny. And he said, “what are we meeting for?” And I said, “I don’t know, what are we meeting for? You guys set it up.”) So we’re there meeting with Frank who’s one of the great minds in this sector, and even outside of the gold sector. But – and then Ian Telfer walks up. But we were talking a bit to Frank about this Pacman theory and he just – he thought it was great. And I remember that Ian Telfer walks up and he starts telling Ian and looks at him and says, “well, what do you think of this, Frank?” And Frank says, “I love it so much, I’m going to start using it from now on.” So, yeah, I do think the Pacman theory, I think it’s coming now. I think these acquisitions are coming now. I think that just like technology and just like how we saw the Ciscos and the 3Coms and everybody gobbling everybody up and making these acquisitions, I think we’re going to begin to see that now. And you really – not to toot your horn a little bit – but you were ahead of the game on that – you were writing about this six years ago, and it was a little bit delayed.

And I even remember on an interview we were doing with John Embry and I finally got John going a little bit, but it was just “come on, John, these guys are afraid. I mean just admit it.” And he said, “yeah, they are. And it will come in time.” And I think this industry went through a depression basically because you had gold 850 at a peak in 1980, silver over 50 bucks, right? But here you move forward to 2002, you’re writing this article and you’ve got gold miserably wallowing around 300 bucks, and I think silver was still in the 4s. So people just didn’t believe that were running these companies. And it takes a guy like an Ian Telfer to come in, or someone like a Frank Giustra, or somebody like a Peter Marrone who, you know, really did not have to sit through that because Peter comes from a financial background, right? So he comes in and then we talk to him and we told the story last time. And he starts doing all these acquisitions and he gets it, and he really takes the stock over at Yamana and builds it from a couple of bucks, near 20 bucks. So I think it’s happening. It’s starting to happen.

I think even the dinosaurs that are out there are finally having to admit, okay, maybe this is a bull market. Even though they always are awaiting the next shoe to drop, it seems like acquisitions are being forced on people. And we talked about Goldcorp versus Newmont last time because really you had Goldcorp, like Cisco, with a big market cap versus say an IBM, or in this case a Newmont. And it’s going to be the people, Jim, isn’t it, that get this, that make these type of acquisitions. Now, we’re starting to see these public announcements, Jim. So where do we go from here? Because I think these things are going to start getting snapped up now. It’s time. [50:16]

JIM: Now this is rather interesting because you were talking about people weren’t getting it. And a couple of years ago, I was interviewing Donald Coxe and he was speaking at a conference and he was telling people, he said, “Start getting out the checkbooks. Start expanding because this is going to be the biggest bull market that you’ve ever seen in history.” And he told the story of when he got to the airport – and I’m not going to mention the name of the company – but this guy was the CEO of the company and he went up to him and he said, “We’ve seen guys like you come around before. You tell us the clouds are going to go away, the sun’s going to come out and then the clouds come back.”

And I think what you’re seeing now – and this is just my opinion – but as these older gentlemen that ran these mining companies are heading into retirement that have spent two-thirds of their working career in a bear market, as the younger guys come in who have seen this bull market for seven years, they’re getting the story. They’re not afraid to say, “you know what, let’s go buy something.” And I can tell you right now, if you take a look at the total gold market – what do we produce? – less than 2500 tonnes of gold a year –I forget, what is it? – 550 million ounces of silver, that is. And that market is so small – and if you take a look at even the gold stock sector and you look at for example, the market cap of the HUI, it is only 140 billion. And we already know that it’s hard to get silver right now. If you want to get one ounce rounds, if you want to get silver Eagles, they’re on backorder. The Treasury is telling and putting everybody on allocation. So imagine what happens when this becomes institutional. Imagine what happens when the public comes in. Imagine what happens when everybody is trying to say, “I want to get in this sector.” Eric, there’s not going to be enough gold; and my prediction is gold will get so expensive it’ll be unaffordable for the average guy. The middle class guy is not going to be able to buy gold. So he may go to silver. And when that becomes hard to get, then they’re going to say, what do we do? Okay, we’re going to go into gold equities because it’s much easier, I think, for most people to go in their laptops and type the symbol AEM, or NEM on a laptop to buy a gold stock. It’s like the Great Depression. When gold went up, the gold stocks like Homestake went up almost 7-fold. And it’s going to be the same thing. I mean gold is up 4-fold since 2001. But if we take a look at even with this pull-back in the HUI, the HUI is up 10-fold from that same period of time.

So I think when this thing really starts to take-off and I think it’s going to start taking off this fall, it’s going to move into next year where I expect we’re going to start seeing a currency crisis develop with not only the dollar but with other currencies; and by 2010, goodness gracious, I don’t even know. I’m not a chart reader but you could put any number on this in terms of where this might be, because imagine when 5% of the money that’s in the market today wants to go in the sector where your top 15 gold stocks in the world are only worth 140 billion. What happens if a trillion comes into this sector? [53:29]

ERIC: It reminds me of a time when I was talking with Peter Marrone, the chairman and CEO of Yamana, and he said to me at one point, and I forget where this was, Jim, because it was so many years – forgive my lack of memory here, but – he said to me, if you take the whole gold and silver equity market and add it all up, at the time, it was about the size of a medium telecom company over in Europe. So it’s a very small sector. Yeah, the HUI’s had a move, it’s gone up. But it really should have never been at 35 as an index. That was an artificial manipulation all the way around and you had stuff trading for darn near free down there on the gold equity side.

You talk about silver. The fact that it’s already kind of becoming very hard to acquire. That will probably get worse going forward. So, yeah, as you said, Jim, what’s easy for people to do? What’s easy? And plus silver is bulky, right, you know? You get these big 1,000 ounce bars, which I prefer, and with a plus or minus on those, and you pick them up and they’re like 80 pound chunks of metal. Yeah, I think in the end – and Richard Russell told us subscribers to buy 100 ounces for that reason, and I argued to buy the 1,000s at the time because you had a lot more bang for your buck. But the thing about it is that I think it is easier as you said to just to go to the computer, just to sit down and go, “Okay, what’s going on here? What can I buy? Well, I don’t want to buy this lumbering dinosaur, Newmont Mining.” So of course, when the funny money starts coming in, everybody is going to want the cheap ones. They’re all going to want to get into the cheap ones, and that’s how in the 70s you had these stocks go from – one went from 7 cents, I think 385 bucks as I said before about one; and they go from a dollar to 4, 5, 600 bucks a share. Will we see that again? Yeah, we probably will, Jim. I don’t exactly know where the mania will end, but I think it’s coming and I think if people can just look at the big picture, and just like we’re talking about, cut out the noise. Going forward there are literally fortunes to be made. T. Boone Pickens is running these ads right now, talking about the greatest wealth transfer in history, and we’ve been talking about that for years, but that what it is, Jim. If you’re in the United States, you can not only protect yourself, but you can do better than that by getting involved in a lot of these quality juniors. And the key is: you’ve got to – it’s difficult for people to find the quality – and as Peter said to me, it is a people business. So you need the asset but you also need the right people. So I think – you know, I’ve always told people, look, go into a fund, go into a Sprott Asset Management up there in Canada, or Jim, you’ve got a fund. And I suspect more of these funds will pop up over time. But get into these funds, do like the wisdom of this guy that sold – the guy in the Reminiscences of a Stock Operator – get your positions established and hold on because this is going to be unbelievable. If it bothers you as you’re an investor in a fund or you have these stocks and they’re getting hammered, then just turn off the computer. As I always like to joke, go kick a soccer ball. Spend time with your family. Don’t get caught up in that noise. That’s nonsense. The longer trend is much, much higher in gold and silver. [56:27]

JIM: You know the most remember thing that I found about this – we’ve been talking about inflation. And you and I were in Costco this weekend, and it’s obvious that we’ve got food inflation and we’ve got energy inflation, so people are buying in bulk; they’re trying to save money, they’re trying to buy their groceries at the cheapest cost.

In fact, this was kind of funny because I didn’t realize how cheap it is at Costco. I love raspberries for breakfast. And so we were in the produce section in Costco, and it says 8.99 – Gawd, that seems a little bit high, I get those at 4 or 5 bucks at Ralph’s – so I picked up three packages and we go up to the counter and the guy says, “no, you get a whole carton.” And you know, it was 16 cartons.

But the point that really struck me –I mean you couldn’t even move down the aisles it was so crowded – if people would take a look at their investments the same way they try to shop for groceries or you know, how they try to shop for bargains at the store. You’ve got companies today that are selling for 25, 50 dollars gold in the ground; you’ve got producers getting ready to go into production here in the next month or two that are selling for $100 compared to their peers that are selling for 5 and 10 times as much – And people don’t want them, Eric!

I remember something. I interviewed John Murphy a couple of years ago. And everybody will remember, John Murphy is a well-known technician. In fact, if you’re becoming a chartered market technician you have to read one of John Murphy’s textbooks. And he was saying, when it comes to the gold market, most technicians will buy on break outs. But if you look at this gold break out that we had – and people started getting in after at 960 and it went 988 – he said what I’ve learned when it comes to gold, he said you don’t buy on the breakout, you buy when it breaks down because when the movement comes – you know, by the time it breaks out of its pattern, you missed 60 percent of the move. And Eric, you follow charts better than anybody I know, but wouldn’t you say that’s true? You buy on the breakdown, not on the breakout. [58:32]

ERIC: Well, first and foremost, I’m a value guy. So I want to buy things when they’re as cheap as possible. And when I was buying oil stocks when it was 11, 12, 13 dollars a barrel – and it’s kind of hard to feel for me because we’re in the stratosphere and people will ask me about oil, but here we are in the 120, 130, 140 range – but, yeah, I agree. Absolutely, you should be buying these things when they’re cheap. But you know what you’re talking about there, Jim: You’re trying to help listeners to think like a professional now. And John is absolutely right in what he was saying in the gold sector – and I believe this in general; I love to buy things when they’re going down – but you want to buy the dips, you want to buy the pull-backs, you want to dollar-cost average. I know you and I get real excited because these things will get really cheap. [59:13]

JIM: Yeah, and I’ve been buying all week.

ERIC: Yeah, but you know, people will be panicking. You might be fielding calls there. “hey, what’s going on here. The sky is falling.” Right? But you and I are so excited. We're looking at what’s on sale, we’re looking at what’s being manipulated. What are the shorts moving down, so we can go ahead and snap up paper from them. And then you come in and you get bidding, Jim. Right? They don’t want to hit you and have to almost hit their short offers because they really don’t want to sell you any paper at low levels; right? They just want to do a paper manipulation.

And I think for people – let me just say something about charts here, okay. A lot of times before you get a big move – explosion – I kind of call it the shakeout before the breakout – they’re going to try to shake the last of the weak hands out because as Richard Russell says, that’s the job of a bull market to take as few riders to get with it as possible. So, they want to shake the people out. They want to get them out. And I think that’s why a show like this is a bit of a nightmare because it’s sort of runs counterintuitive to that. It makes it so that some of these people, who might otherwise have sold, kind of hang on. Kind of listening into the show and get strength and they decide, “You know what, I’m not going to sell what I own in my fund. I am not going to my shares. I’m going to look at the big picture. I’m going to hold on to this stuff.” In a way, the bull market doesn’t like that. So much for that. I guess your show is a hindrance to shaking out the people sometimes. [1:00:30]

JIM: You know, this reminds me. I have a friend by the name of George – a very successful businessman. And George used to have a broker – an older gentleman, who unfortunately passed away a couple of years ago. And when George got into the gold sector, this was back in 2002, 2003 and his older broker friend said, “you know George, I agree with you but I think you’re early.” And then when it took off, Eric, when it hit 300, 400 and 500 he said, “you know, this even took me by surprise.” And one of the things he told George just a couple of months before he passed away – and I think this is where we are today and I think it is very appropriate – he said, “George, when you wake up in the morning and you don’t know if gold is going to be up $20 or it’s going to be down $20 and there is a lot of noise, get ready because that is just before it makes its next big explosive run.” And that’s what we have right now.

We have a lot of people talking deflation – which is you know, take a look at the supermarket, folks; or what you’re paying at the store.

What I’d like to do – we called this section The Wisdom of Old Mr. Partridge. And I’d recommend if you’re listening to this program, pick up a copy of Reminiscences of a Stock Operator and it’s called The Wisdom of Old Mr. Partridge, and I want to end with what he said. And I think this sums it up:

Another thing I noticed in studying my plays in Fullerton’s office after I began to trade less unintelligently was that my initial operations seldom showed me a loss. That naturally made me decide to start big. It gave me confidence in my own judgment before I allowed it to be vitiated by the advice of others, or even by my own impatience at times. Without faith in his own judgment, no man can go very far in this game. That is about all I have learned: to study general conditions, to take a position, and to stick to it. I can wait without a twinge of impatient, see a setback without being shaken, knowing that is only temporary. [1:02:41]

ERIC: That’s a great part of the book. And you know, Jim, if you listen though it’s kind of funny – I’m jumping in here a little bit, but we have – still to this day they go and they talk to the greatest traders on Wall Street and they do a survey, you know, what is the greatest book? You think you would have some guy with some technical book or this or that guy, but over 90% of them, to this day, consider that the bible of trading. But what’s funny is when you look at that section that we covered today, I mean you can comment on this but I tell you, Jesse Livermore when you really listen to him, he’s basically saying: Be an investor. [1:03:17]

JIM: Yeah, and that’s what he said. Look at the general trend, be sure, do your research and when you’re sure of that trend take your position and you hold that position. You don’t get shaken out by the occasional swings to and fro, the ups and downs in the market and you hold that until the bull market ends. And one of the things that I learned from my mentor a couple of years ago – and this was back in 2003, I was being mentored by somebody that came from the technical side – and he said, “there are three primary movements – and for anybody that knows Dow Theory will know this – you’ve got three waves up and two corrections in between. And Eric, you know, the first wave: smart money. That’s the Marc Fabers, the Jimmy Rogers, that get in their real early. Then you get a correction. The second wave – the institutions come in and then they start buying big time. Then you get a correction. And then the third phase – the public like they were, remember in 1978 to 1980 when they were rounding up around corners to sell their silverware and stuff like that. And that’s why I don’t even think that we’re even into the second phase yet because like I said, I take a look at some of the big mutual fund holdings and I look at what they have, they may own a Newmont, they may own an Agnico-Eagle, or maybe a Yamana – but as a percentage of their portfolio, it’s next to nothing.

Well, listen, we’ve run out of time. I want to thank you – we’re having a ball out here. Eric is out here visiting a group of his investors – Eric, if anybody would like get in touch with you, why don’t you tell them how you could do so? [1:04:50]

ERIC: The email address I have is ericking5@live.com.

JIM: All right, Eric. Thanks so much for joining us. And let me say, what are we having tonight? Steaks?

ERIC: Filet Mignon.

JIM: Okay. Coming up Q-Lines. We’ll be answering your questions in the next hour. Right after this.

Part 3

Q-Calls

JOHN: Hidy-ho, there. Time to look at the Q-lines right now, meaning the question line, which is online – well, it's in fact, on phone,24 hours a day in order to take your questions and comments. We have a toll free number, toll free US and Canada, which is 800-794-6480. If you'd like to call in from the rest of the world, it does work as well, but you'll have to pay for whatever your standard international rates are.

As we answer your questions, please remember that the content here on the program is for information and educational purposes only. You should not consider this as a solicitation or offer to purchase or sell securities and our responses to your inquiries here are based on the personal opinions of Jim Puplava or whatever guests he may have here on the program. And because we don't know a lot about you, we cannot take into account your suitability, your objectives or your risk tolerance. And because of that, these are generic answers to the questions that you pose and Financial Sense Newshour is not liable to any person for financial losses that result in investing in companies profiled here on the program. A couple of things when you call in, please just give us your first name, where you're calling from. Keep it under a minute because some people have been running on and writing masters or doctoral theses here and we just can't use those. And because of the large numbers of calls now, we sometimes can't get the same people in every week if they repeat calls and that's basically where we're at. It's just a matter of logistics and time. Time being the critical factor right here.

Let's go to the Q-lines. First caller is from Illinois.

Hi. This is George in Illinois. I'm wondering with the market being up this week, this is Thursday afternoon at about quarter to 4:00 eastern standard time, do you think this might be the fourth year presidential cycle bull market –or at least rally – that would take us through the end of the year, or just a head fake and we're back to business as usual next week?

JIM: You know, George, I still think this is probably a bear market rally. There is still a lot more problems that we have to face as a country; and as you can see from Congress, we're not facing those issues, so I think there is going to be more losses. So it's not until we start getting into the, what I call the hyperinflationary phase, that we will start to inflate our way out of this in nominal terms. In other worlds, the stock market will be going up. It will be doing so in nominal terms but it will still actually be inflating against real money, such as gold. [2:37]

This is Dan in Missouri. Since the value of property has fallen, then I would think it would be possible to get a property tax adjustment depending on your state and how bad things really are. You should get a much lower property tax cost. At least enough for a seven course meal, a six pack and a boloney sandwich. Comments, Jim?

JIM: You know, Dan, they are quick to raise it when things are going up, but you almost have to fight with them when things are going down. States rely a lot on property taxes and they are reluctant to change them. [3:10]

Great show. You're the best. I listened to the Bud Burrell interview twice, and after I wanted to get my gun, gold and some provisions and go hide in a cave. Near the end of it, you said that he wouldn't take any company public right now because the market is so crooked or whatever. I mean I'm reluctant to even invest in anything and I'm thinking about selling it go all and going into cash. It really wasn't my question. More of a comment. My question is: What does this new interest in short selling by Cox really mean to the whole industry? I've seen some activity, positive activity from some of the Canadian juniors I follow. I really think now if I sell them, sell them at absolute bottom, but I just wish you'd talk about the short selling which you probably will in some other segments and sort of about the Canadian juniors and the resource market in general.

JIM: You didn't give your name, but I'd recommend listening to the second hour when we talk about the wisdom of Mr. Partridge with Eric King. One of the problems that the short sellers have is they are working against the primary trend and the primary trend of gold is up. I mean with inflation on the rise, unless you need some money for liquid cash and you want to sleep at night, you're going to keep some money in cash, but if you're worried about fluctuations and you want liquidity, boy, I'd tell you, with the amount of devaluation I see coming, I'd be using gold and silver bullion as my cash position since it represents real money. But in terms of the juniors, if you sold them right now you'd be selling them at a bottom and besides the short sellers are going against the primary trend. [4:51]

Hi. This is Denny calling from the San Francisco Bay Area. I have a question about the bank failures. Given that there would be massive bank closures coming our way, do you think it's safe to store gold in a safe deposit box at a bank?

JIM: Yeah. If it's a major bank and especially some of the largest, they'll never let the large banks go under, and if you start seeing things get really bad, and you'll know in advance, the minute you start to see that kind of bad news, that would be the time to take it out of the deposit box. But if you stick with the large banks, they will chop down every tree in the forest to protect them and they'll print as many dollars as they need to to protect them as well. [5:31]

Hello, Jim and John. This is William from Calgary, Alberta, Canada. Over the years, Jim has repeatedly spoken highly of the Central Fund of Canada. Would you still feel that way now? I’m thinking of derivative risks. And the second question: it is so hard to uncover the degree of exposure from derivatives and similar exotica that a bank or institution has. Is there a way to do such research? Thank you very, very much for the insight you impart to your listeners.

JIM: You know, it's very difficult, the financial accounting of banks is so opaque and they have so much stuff like the large ones that they keep off balance sheet that they can manipulate earnings very easily. Yeah. There is a way. There are some rating agencies out there that are independent that rate the banks. Weiss Research used to be one, at least here the US. But getting to your first question, the Central Fund of Canada, would I recommend it, you bet. 60% gold, 40% silver. It's up over 20% this year in comparison to gold and silver which are only up 11 and 14. Low cost management, kept in a safe place in Vancouver and Toronto. Still recommend it. [6:47]

My name is Grant. I'm from Georgia. I just listened to your interview with Bud Burrell, The Greatest Crime in History and if somebody with 401(k) money, who depended on it for a future retirement, I wondered what I'd do. Do I take it out of the stock market? What can we do to protect our savings?

JIM: It depends on what your options are, Grant, in terms of what you have in your 401(k). If you have things like international bonds, hard assets such as, let's say, a natural resource fund – if all you're doing is putting money in your 401(k), maybe another strategy is to reduce some contributions and put money outside of your 401(k) if you have some limitations. The other thing I don't know is on your 401(k) do you have matching contributions for your employer? Grant, I'd wish you'd give me a little more information before I could really adequately answer your question. [7:45]

Dave in New York. I just wanted to – I know we talk about Minefinders a lot, but if you saw the action opinion on Tuesday, it was just totally, totally ridiculous. The stock was 12-bid 50,000. This is how manipulated it is and I want to make sure anyone who holds the stock out there can see this. It was 12-bid for 50,000 shares with gold up on the day. That 12-bid gets hit, so the buyer knocks out the 12-bid. Then the next three trades in the stock went from 12 to 11 ¾ to 11 ½ to 11.20. And at the end of the day, I think almost a million shares on the AMEX traded. So you had a fellow bury his stock from 12 down to $11.15 cents on basically just smashing the stock, quite honestly, for no reason whatsoever other than to try to freak people out. And I just want you to know, I did call the CEO on that just to let him know. He also had had another phone call. I am not sure exactly what he can do about it, if he can do anything, but I wanted you to see if you saw it on Tuesday. And I wanted to just – maybe whoever is holding the stock out there, don't freak out. I'm in the business. I watch this stuff, the manipulation on the stock is just totally insane. Anyway, thanks for giving me my two cents.

JIM: You know, Dave, here is the situation, and I think this is what happened with Minefinders. Back in February when they released their update on their Dolores project, their update on their feasibility, a couple of things happened. Number one, from their 2006 feasibility study, costs went from 228 to 297, which is not out of line by the way given that mining costs have gone up about 25% a year. And they also said that their capital costs had gone up 50 million. So what happened is after that announcement, if you go back and study the short position, there was a small amount of shorts in Minefinders and then all of a sudden you had a two million short position came in. And then what happened is we interviewed Mark Bailey on the program –and I had talked to a lot of other analysts – and he said, “no, we don't need any capital costs. We have the money in the bank and we have a line of credit.” And what happened is the stock took off along with the gold market from January all of the way up until mid March when gold got up to, like 1,040. And what happened is the unfortunate thing is there was a large brokerage firm who was literally and this is a fact, they were sending emails to large fund managers telling them to short. Telling them to short Minefinders because they thought there was going to have to be a financing and I happen to know, talking from the CEO, right after that short position came in, he got phone calls from four investment banks. And so that, I think there was a – misanalyzed the situation, and so they came in. And unfortunately, Dave, what has happened is we've had these strong bull market rallies and what has happened is every time the stock went up in order to protect their short position, they have come in and shorted even more. So now you've got a 7 ½ million short position.

And yes, I did see what you were talking about between July 15th and July 19th. They came in and it's estimated that there is a two million naked short position in the stock, so the real short position in Minefinders is probably closer to 10 million now instead of the 7 ½ million officially reported because as you're reporting on July 15th, that was unnatural selling. In other words, if I was an institution and wanted to get out of my Minefinders position, that's not the way you sell out of a stock.

And it was amazing because they had a press release on Friday, the day we're doing this show, saying that yes we had these protestors. It set us back by a month. They laid it out. They are going to have a press conference and analyst call in September, so there has been a one month play, but you know something, I'm going to take my hat off to the guy that runs the company, Mark Bailey, because instead of paying out extortion – and that's what these protestors wanted and you see this any time a mine goes into production, they've extorted money out of Goldcorp, Glamis, Agnico-Eagle, Gammon – this is the typical pattern – he said, “No. I would rather take the money and put it into the community,” and so that's why he got the government help. So he's been straightforward about this and unfortunately, you've got a large bad apple investment bank that was hoping to do a financing here and they are not going to get the financing. So in my opinion, and this is just my opinion, is the shorts are trapped. They are not going to be able to cover. And wait to see what happens when this company goes into production. [12:38]

Hello. My name is Robert from Toronto, and I'm calling in regard to the last couple of months you guys have been quoting a gentleman by the name of T. Pickens and the reason I'm calling is I found some information about him in regards to his “exchange” plan, I'll call it. I do think that he also has another reason, and that's self-promotion because I found that he has a company, a private company called Mesa Power and he is presently buying up leases in the United States because he's working on a wind power project that – and there are about 700 windmills in Texas and it’s to be completed in 2014. I see nothing wrong with that, but I also just wanted for the record that he's also possibly doing this plan in conjunction with self interest.

JIM: You know, Robert, the fact that he’ll make a buck on this, there is nothing wrong with it. That's capitalism. I mean nobody would expect for him to do this for free, but I also believe at heart he's very concerned by what he sees in terms of the America's energy situation. And if we solve this energy crisis in this country, it's going to be because of people like T. Boone Pickens. It will not be because of Congress. [13:50]

JOHN: You could probably make the same argument for Vice- President Al Gore who is investing in companies which stand to profit from the proposed cap-and-trade system, so it's --

JIM: In fact, he has a cap-and-trade company.

Hi. This is Greg from Weatherford, Texas. And my question is concerning naked short sales. My question is: Would the best course of events be for companies to band together and sue the SEC for preferential treatment. It seems like there is more equities out there than just 19 or so financial companies. I'd like to hear what your take is on my idea.

JIM: Well, there is an attorney that got fired for opening up an investigation and he has now got a lawsuit with the SEC because they stopped him from doing an investigation. I don't know if that’d get anywhere. I think how you're going to see this issue resolved is in the private court systems by the efforts of John O'Quinn and people like Wes Christian that are going to get these companies on racketeering charges. Just as they were able to successfully go against the tobacco companies and once they do and become successful, it's going to have a ripple effect all through Wall Street because I think that's what’s going to solve this is litigation because the regulators are asleep at the wheel. [15:11]

Hi, Jim. This is Bob from New York. I assume you've been reading some of the recent arguments of deflation including those put out by John Mauldin. The gist of it seems to be that the destruction of wealth that's going on right now as a result of the credit crunch is wiping out wealth at a much faster rate than the increase in money supply. In fact, some like John Hussman believe that the idea of greater liquidity sloshing around is essentially a myth to begin with. Some of the deflationists like Mauldin only believe the market will decline another 10 percent, but others believe we might be in for a 50% wipe out, that the emerging markets and commodities will get sucked into a worldwide recession and go way down, and that the value of the dollar will shoot up. Do you see any merits in these arguments? And if they turn out to be correct, what do you think will be the trajectory of the precious metals, the major metal stocks and the juniors?

JIM: Could there be a deflation? Sure. But I would say the probability would only be about 5%, so I don't see much merit in any of these deflation arguments. I mean just look around and you see inflation everywhere. I mean look at the bailouts. We had this rebate package that's 150 billion. They are already talking about another rebate package. They are doing a 300 billion dollar bailout of homeowners and financial institutions; then they are talking about they are going to have to bail out Fannie and Freddie.

And remember, in a fiat system, and this is what I think they don't understand is the spender of last resort is always the government, and boy, If you could just take a look at the spending program, I mean Barack Obama has a Senate bill that would transfer almost 1% of US GDP each year as a wealth transfer to the rest of the world to end poverty. You've got a trillion dollar spending program coming from Obama. McCain has spending programs. We've got the war in Iraq, the war in Afghanistan and we've got the baby boomers heading into retirement and somebody wants to tell me politicians are going to say they are going to stop spending money? These guys are like drunken sailors right now. So the probability of deflation is about 5%. [17:23]

Hi Jim and John. This is DT from Seattle. I was wondering what your estimate was of how much the government would have to expand the money supply if they ended up monetizing to pay for all of the unfunded liabilities, budget deficits and bailouts of failed institutions? Is it on the order of 10 times, 100 times, a 1000 times?

JIM: You know, I think in the end, it's probably going to be 1000 times. I mean, right now, we're adding almost two to three trillion dollars a year in terms of unfunded liabilities and there is a whole rash of new subsidies they are talking about enacting next year depending on who wins the election. I think Laurence Kotlikoff said the current unfunded liabilities in the United States are 54 trillion dollars and that figure is going up each year. [18:09]

Hey Jim and John, this is Chris from Florida. Great show. A caller last week asked a question that you sort of danced around the answer of. But after listening to the Burrell interview and going to the other website and listening to the in-depth interviews I guess in the last part of 05, why would I own any Canadian small caps? I mean I know you said you're an optimist and that's fine, but when it finally all comes down, aren't they going to just slap them on the wrist and say, “okay, we're not going to allow in in the future and for the betterment of the markets we're going to grandfather all of the nefarious trades you made in the past.” I mean I see some great companies up there that I watch, but they are just getting pounded all of the time even when the prices of what they are exploring for go up. So please address why I should hold small cap Canadian stocks at all.

JIM: Chris, my main argument for that is not just optimism. It's the primary trend of the market. In other words, I expect gold to go much, much higher. And that's what they are operating against. And if you buy a high quality junior late stage development or a producer, they can produce more. In other words, if they are producing they are making money, and especially if prices go higher. Second, if it's a late stage development, just take a look at the take out this week of Aurelian by Kinross. You had on Friday Pan American Silver saying that they are going to make an acquisition. You've had Agnico-Eagle invest $100 million in two upcoming juniors and they did that quietly without much fanfare. You're going to see a wave of takeovers. And I have to point out, in a takeover, if there is 50 million shares outstanding, that's all you're going to get. That's all the company buys is 50 million shares. If there is naked short selling, they’re scrambling and that's why sometime in takeovers you can see the stock go up above the takeover price because that's the shorts coming in trying to cover. So my main argument for this is the primary trend of the market. We haven't even gotten full steam into the second phase of a bull market. Just imagine what it's going to be like when we get to the third phase. And listen to the second hour that I did on Eric King on the wisdom of Mr. Partridge. [20:25]

My name is Peter from Canada. And I came across the term recently called “dark pools.” I wonder what your understanding of it is, how big is this problem and what kind of damage it can do to the stock market. And I’ll just bring the point to a greater there here, my so-called big picture, there seems to be manipulation and lies at every stage, every segment of the economy, capital market, banking systems. Even gold has been manipulated by hedge funds, central banks, possibly the Federal Reserve. And to me, this shows that there is more greed and greater scarcity whether it be capital or commodities, food etc. I just wonder what it will talk to get this knocked out of the system.

JIM: Peter, dark pools are something that's under the radar screen of the SEC right know, and basically as the name suggests dark pools lack a lot of transparency. They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges often offering, let's say, unprecedented anonymity, and that's why they are done; and a lot of the naked short selling is also done in this way. But I think you are going to start seeing eventually with enough pressure and as more of this comes out –even Cramer came out with an editorial about this this week. So as more and more of this comes to the forefront and comes out, I think there is going to be a move against this. [21:59]

Hi. This is Joe calling from Arizona. I've been buying gold and silver bullion for a number of years, thank goodness, and also numismatics. What are the chances, however, with capital controls that I might be restricted on ownership of this? I'm speaking of government confiscation, I guess, is the word. If you can enlighten me on that, I'd appreciate it.

JIM: Joe, I really don't see confiscation. We're not a passive public the way it was in 1933, and people are a lot more sophisticated and aware of this, and especially people buying bullion. If they were to confiscate anything, it might come through the ETF, which is the largest holding of gold. But what they might do is create higher taxes on capital gains. For example, when you trade bullion right now you pay a higher capital gains tax than you would trading stocks; and that's where I think they would try to punish people is through higher taxes on gains. [22:57]

Jim, this is Greg calling from Princeton, New Jersey. Hope you and John are doing well. Quick question around the Dow and your predictions for the remainder of the year. As you mentioned during hyperinflationary periods you expect the Dow and the S&P too to go up in value. My question is I haven't heard you refer to anything about the Oreo cookie for a week or two, and I'm just wondering your thoughts on the movement of the Dow Industrials through the remainder of the year. Thanks for your help.

JIM: You know what? The creamy filling that I was talking about was going to be less creamy as we saw the price of oil go up; and then we said it's going to take maybe oil going down to a much, much lower level, maybe below the 125 which is which it is right now. Maybe it bottoms out at 100, 110, 115. I don't know. And you could get a brief spike – maybe we hit 12,000. But it's not going to be as creamy as originally thought. These problems are much, much worse, so I think we will continue on the bear market side as we head into the fall, unless they try to pump it a month before the election – and that's a possibility. But I think there are just too many problems out there. And as we inflate, and it's going to take – when they really step up the peddle to inflate, which I expect that to happen probably leading into next year in the crisis window, that's when you see the rise in equities. They'll bottom, they'll start to rise in nominal terms as people look to it as a safe haven to get out of paper as paper depreciates and especially as the dollar goes down. [24:28]

Hello, Jim and John. This is Lance from Vancouver, Washington. I had a question about this issue of money supply growth. The figures like the Shadow Stats figure for M3 shows a very large monetary growth. I was watching one of the financial programs on cable a week or two ago that was claiming that money supply is not growing. I believe they were referring to M2 and MZM, and so there seems to be a big gulf in the perception about monetary growth. I was wondering whether you could have someone on some time who could go into a detailed discussion of what goes into the various monetary calculations, and why M3 is the better indicator of monetary growth than the other.

JIM: We will have somebody. Probably, Lance, it’s a good time to have John Williams back on the program. M3 is high-powered money. High-powered money is what moves markets, but if you look at some of the indicators, if you look at M2 which was below 7.3 trillion last August, we're currently at 7.7 trillion and so even though it's flattened out in the last month and a half. Now, if you look at MZM, which is money of zero maturity, that was somewhere in the neighborhood of roughly. Let me see. I'm looking at a chart of around 7.6 trillion, and today, as we’re running two weeks behind, it's almost 8.8 trillion. So it's gone from 7.6 trillion to 8.8 trillion in the last year. [26:11]

Hello, this is Emilio from Santander, Spain. And I have a couple of questions for you. The first is given these crises and turmoil, do you think there is any change in the assessment of risk by investors. Are they reconsidering greater risk, or is this any change of assessment of risk and how do you think it's going to evolve in the next couple of years? And my second question is: if you think we are in a credit crunch and so just for your perception of “no central banks left behind,” what do you think should be done?

JIM: Emilio, there has been some greater assessment of risk and that’s reflected by widening credit spreads. That's the spread by, let's say, corporate debt of various categories all of the way to junk bonds to, let's say, Treasuries. So there is an appreciation of risk as credit spreads have widened. Also you have something called the ‘Ted spread.’ Now that’s spiked up and it's been going down but we've been going through periodic spikes here. In terms of a credit crunch, the one thing you have to do is one of the reasons we're in this mess is because we created too much cheap money. People over-leveraged, over-borrowed and over-speculated and that's why we're in this mess. So the one thing you would want to do if you wanted to fix this is raise interest rates, contract the money supply, get rid of the inflation rate and stop printing money and expanding credit. But they are not doing that and no politician will. And that’s why I think we're in the end game of a fiat currency system. [27:55]

Hi. This is Paul from Phoenix. Thank you very much for the show. My first question is to Jim. Could you please elaborate on the exit tax that was attached to the Veterans bill. Is this retroactive or does it affect only new accounts? How does this also affect bullion purchases overseas? My next question is to John. You keep referring to end game. Is that the end game that was put on video by Mr. Alex Jones and if you believe in his hypothesis, then isn’t everything we’re doing a moot point?

JOHN: As far as the first question goes, the bill was called The Heroes Earnings Assistance and Relief Act of 2008. It was to provide a range of tax breaks for veterans, but it also imposed the first ever exit tax on even moderately wealthy people who expatriate. Now, the people who are affected by this are people who have had a net income tax liability that exceeds $139,000 adjusted for inflation for the five years preceding the date before you terminate your US citizenship. And you have to have right now, a net worth of 2 million or more on such date. There is some good news attached to this in the fact that the first $600,000 of gains are excluded from this whole area. Now, that's for now. As a matter of fact that exclusion goes up to $1.2 million if it's a married couple that files jointly when they both expatriate. This applies to anybody who expatriates from the time President Bush signs the bill into law – and I haven't checked whether or not that happened. But that's basically the status of what this is. And of course, Jim, those things can all change overtime. You know how the levels and thresholds tend to creep with time.

The second part of the question is there are various different types of end games and people always need to understand, when you're following politics –whether it's in the area of certain financial issues, education issues, whatever it happens to be. There are end games in mind that people ply, largely promoted by various types of think tanks and various foundations out there, some of whom or most of whom receive government money. So it's almost an incestuous relationship. And what they have done to push long term end games or agendas is to break these up into various bills, and then to contain the debate. And the debate is contained simply because of the fact that if you're only looking at one thing at a time, Jim, say, the whole education agenda like Bush's No Child Left Behind. It really wasn't President Bush's. It was the ‘educrats,’ as I call them, who were already talking about it back in the 1980s. And they had things such as School to Work and Goals 2000 and all of these related issues. And what they did is they broke them up into individual pieces of legislation so that people wouldn't understand what the end game is all about as opposed to, I think Alex Jones’ end game which would be some kind of global governance. But that is an end game that is being proposed by a lot of people such as Strobe Talbott and Zbigniew Brzezinski and Henry Kissinger and others; and they are pretty much on the record for saying that. So hopefully that answers your question. [30:56]

Hello, Jim. This is Dave from Northwest Indiana region. About a year ago I started listening to your program and have been doing it ever since. In 2005 around mid-year started investing in nothing but silver and gold. Now that I have my bullion base built, I'd like to start looking at the gold juniors which you've been talking about. Do you have a single point or two points of contact that a first time gold junior stock buyer could be hearing for?

JIM: You know, Dave, if you're looking at getting into juniors, number one, you're going to have to do your research. I'm going to recommend that you get yourself a little bit of background. There is a book out that I'd like to you look it up. You can get it from the Northern Miner or you might be able to get it from Amazon. It's called Mining Explained, A Layman's Guide by the Northern Miner. You're going to want to pick up a book on that. And there is a book out there by John Katz and Frank Holmes. It's a new book out. Let's see, it's supposed to be released August 4th. Fortunately, I've got an advanced copy of that book. It's called the Gold Watcher: Demystifying Gold Investing. And I'm going to recommend that you pick up the Northern Miner book and this book and start reading that and becoming educated.

Then I'm going to recommend, there is a number of newsletters out there that are written by people that have no bias. They don't get paid in options. One would be John Doody’s Gold Stock Analyst and another one would be the Or Metal Report by Claude Cormier. It would be another great one. And then Hard Rock Analyst by the Coffin brothers. So you know, at least get yourself one or two of those newsletters so you can get yourself familiar with it, and then start doing your due diligence. And I'd recommend that the place to do your due diligence is at the website. In other words, once you find a company that you like, then go to the company's website, study, find out what they are doing; and if you have questions, talk directly to management and get your information that way. There is a tendency a lot of times to people who go to chat rooms. You have to understand that chat rooms are a place where you get a lot of manipulation and bad information on these chat rooms; and we always recommend that you go to the horse's mouth or go directly to the company. So my recommendation is pick up a couple of books, become knowledgeable, maybe subscribe to one or two newsletters to get your feet wet and get an understanding. And then go to the company websites. And I think when you have that, then you're going to be on the road to success here. I can't recommend individual companies. And we're going to periodically, we’ve got I think in September and then also my annual gold show Thanksgiving weekend, we interview anywhere from 25 to 30 companies, and you can listen to those companies and maybe that’ll give you some ideas. But I can't make specific recommendations other than that. [33:48]

Hello, I'm David. And after listening to your program for the last six years, I decided to call E-Trade and ask them if they have sold my stock short and was told that if you have a margin account they can lend out your shares. For example, let's say you have a margin of 5000 dollars to buy stocks, and then you have 300,000 dollars of your stock. Well, since you have a margin account, they can use all 300,000 of your stock for their own personal enrichment. In fact, they can use all of your 300,000 even if you have zero on margin as long as you have a margin account with them. When I heard this, I said close out my margin account. Another quick question, do you think the price protection theme will try to bolster Fannie Mae, Freddie Mac, Washington Mutual, Lehman Brothers and a myriad of others?

JIM: David, I'm glad to hear you closed out your margin account. Especially if you own juniors. You should never own juniors in a margin account. You're just playing with the devil and allowing them to work against you. Number two, with the government bail out, the large institutions, in the end I think they will probably end up doing that with Fannie and Freddie. [35:00]

This is Alan from Albuquerque. I recently turned 59 ½. I'm wondering if it would make sense to transfer all of my money from my IRA to my standard brokerage account to take advantage of a more favorable tax rate for capital gains and dividends. I'm also concerned that the income tax rates will increase next year and beyond. I always seem to be classified by the politicians as part of the rich as not paying their fair share. Not having money in an IRA also eliminates the worry of any other creative ways that the government can come up with to get the money from IRAs. What are your thoughts?

JIM: Boy, Alan, if you're thinking about cashing out your IRA and transferring it to a standard brokerage account, you know, you'd have to make a tax assessment because anything coming out of an IRA is taxed as ordinary income. So you would have to add that to what your regular income tax bracket is this year. So, if it pushes you up in the 35% tax bracket, I mean you haven't told me how large your IRA is, so I think that's something you're going to take up with your tax advisor first and make sure you don't take a big hit. In terms of an IRA, you can have an IRA in a standard brokerage account, so you can do just about anything that you can do outside of an IRA. But in terms of whether you should cash it out, you haven't given me enough tax information and that's something you should discuss with your financial or, let’s say, your tax advisor. [36:23]

Hello, this is Robert from Toronto. And I am calling in regards to a comment recently made by Marc Faber, and he said the following: Global liquidity is under some relative tightening and that is unfavorable for all asset classes. There will be a sharp correction in commodity prices. If Marc is correct, is this not the best time to basically sell all your stock and wait on the side line for this correction because it appears he is talking about all asset classes which would include juniors, and I guess oil stocks? So my question is: Is it time to sell?

JIM: You know, Robert, he's talking about a short term phenomenon here because the money supply figures are tightening a bit, although I'm looking at a Bloomberg screen and I'm still seeing double digit money growth, and that is responsible for what you're seeing here in some of this pull back in commodities, but Marc is referring short term. But if you listen to the second hour segment that I did with Eric King on the primary trend movements – and I can tell you this, the primary trend movements in energy, in gold, are up. And so if you can withstand a pull back and you don't get nervous, when you think of selling something and by the time you pay your taxes, you know, you're going to have to make a couple of assumptions here. One, you're selling at the top. Two, you're going to be able to get back in at the bottom, and three, the amount of tax that's you're going to pay are going to out weigh any saving that you might have in terms of short term fluctuations. And so, as long as you're in the primary trend – I can remember something that Jimmy Rogers said and it's something that I believe is very true here: You are going to see some slow down in growth (and this is an issue I'm going to address regarding China in the weeks ahead) and when you see that pull back and the headlines are saying the commodity bubble’s over, this is it and the media goes bonkers, as I'm sure they will if oil goes a little lower, let's say it hits 110, 115 or I don't even know 100, that is the time you want to back up the truck. So we're in a primary bull market when it comes to energy, we're in a primary bull market when it comes to gold, and you can take a look at a gold chart or an oil chart and just look at those pull backs but look at general direction. To me, I think trying to figure out when to get out at the top, when to get out at the bottom, I'd highly recommend you pick up a copy of Reminiscences of a Stock Operator, listen to that second hour and read that book because I'll tell you, the best thing that Livermore learned was to stay invested, to be patient, to sit tight in the primary moves. [39:02]

Hi Jim and John, this is Rob calling from Niagara Falls, Ontario Canada. There is light at the end of the tunnel, but it's the train heading towards us. Easy question for you, Jim. This crisis window that you're predicting between 2009 and 2012, how long is the crisis going to last? Can you take some guesses at that?

JIM: Probably into the middle of the next decade. In other words, the severity of the crisis will probably be between 2009 and 2012. Whether it gets much more severe beyond that is going to depend on the leadership in this country and around the globe; and also as to whether Richard Heinberg, his point about last man standing. In other words, if global leaders work in a cooperative fashion as the supply of energy production goes down globally, if we can work in cooperation, then maybe by mid-decade we should start to see improvements. But if we don't cooperate with each other and we get to what Heinberg calls his last-man-standing scenario, then we're talking about war and then it could get quite ugly. [40:05]

Hey, Jim and John, a question on natural gas –by the way, this is Colby from Missouri. Natural gas has got hammered and I’m still trying to figure out why. So if you could shed any light on that for me and if it’s going to have a rebound.

JIM: You know, Colby, it's the whole energy sector. I mean after hitting a peak, oil peaked at 147. Here we are at 122, and we were getting into the low teens for natural gas. I can tell you right now, we're well below normal levels in terms of gas build heading into winter, so we're going through an energy correction and I would use that if you want to get into the energy sector. You're going to have a great time here picking some bargains at some great prices because by the time winter comes, oil and natural gas prices are going to be much higher from where they are today. [41:01]

Hello, Jim and John. This is John from Pennsylvania. A quick question on taxes. My understanding is that Warren Buffett made a statement that he pays a lower tax rate than his secretary. I believe it was something along the lines that he was paying roughly 17% and his secretary was paying 30%. I was just curious how does he get to that number.

JIM: You know, John, what he was probably referring to is Social Security taxes. If you add Social Security taxes, most of Warren Buffett's gains and the way he gets paid, I mean his salary is very low, so if he has any extra living costs, he sells off shares of Berkshire Hathaway which by the way, the long term capital gains rate is 15%. But that is something that Warren has chosen to do. And also Berkshire Hathaway, the way he is set up and the way he invests, he does that to minimize taxes. [41:56]

Hello, Jim and John. This is Dave in Nevada. Most of my liquid assets have been moved to gold, silver and precious metal related mining shares. However, it's necessary to keep some dollars in a checking account to conduct personal and business related transactions. With the increasing likelihood of major problems with banks, I am considering an alternative. US Global Investors has a treasury cash fund that invests in treasury securities, short term treasury bills and notes. You deposit money and then can write checks just like a normal bank checking account. The account also pays some minimal interest. My question is: In your opinion, would a checking account of this type of fund which invests directly in treasury securities be safer than a checking account at a bank. In my way of thinking, it should be safer, but I'd like to hear your opinions. US Global Investors’ website is www.USfunds.com. And the treasury cash funds symbol is USTXX.

JIM: You know, Dave, I see nothing wrong with keeping a minimal amount in a checking fund for your daily bills. It's only when you start getting into larger amounts where you get beyond the SIPC that you have to worry. We manage a lot of money, so when we're in cash, we're in treasuries. So your idea of large amounts or your larger amount keeping it in a treasury account I think is a very sound one and if you have check writing privileges that is also sound, but you're still going to need a checking account, so you want to keep some money in the local bank. [43:41]

Hi. This is Cheryl from Sarasota. Charles Nimmer [phon.] a market analyst and forecaster has suggested that the Fed's funds rate for the next 10 years, he believes that the Fed will start raising rates in 09 and continue with rate increases until around 2011 or 2012 after which he suggests a sharp and rapid drop in the rates. He then believes that rates will remain low for several years. I was wondering if your picture of inflation and deflation is consistent with his prediction for the Fed funds rates.

JIM: You know, Cheryl, I think probably sometime next year, the Fed will have to start making small incremental increases in the rate of interest because of the higher inflation rates. If you look at the PPI and CPI figures that just came out last week, producer price inflation is up 9% year over year. Headline CPI inflation is up over 5% - and I think those figures will get higher. And at some point, the Fed is going to have to begin raising interest rates, and the only reason they'll be doing it is because of the rise in inflation. But when they do, they'll do it very slowly just like they did between 2004 because of the economy at this point is way too leveraged, and I believe even during the process that they are raising interest rates that interest rates will remain negative. In other words, the federal funds rate will be well below the inflation rate.

Hello. This is Matt, an American living in the UK. I love your show and I've been listening for about three years. I was wondering if you could tell me how safe you think are safe deposit boxes for example if you want to hold bullion in there in any of the major US banks, such as Wachovia, Bank of America.

JIM: You know, Matt, I don't know how much bullion you own. If it's a small amount, you know, hide it in your house. If it's a large amount, keep it in a safety deposit box. But watch the headlines. The minute you hear any kind of trouble in any of these institutions, get your gold out. [45:46]

Jim, my name is Eric. I'm here in Chicago. I have two questions. The first one is more general. I have here in the Central Fund of Canada, Ltd, and my broker described the Central Fund of Canada, Ltd. as specializing as being a self-governing passive holding company with most of its assets held in gold and silver bullion. I'm not quite sure what this means, a passive holding company. What does that mean?

And my other question is about Bud Burrell’s comments on your July 5th webcast. Now, I'm very familiar with your position about the spike in oil being the result of a supply and demand issue, but Mr. Burrell doesn't seem to agree with that point. On that particular webcast, he said very clearly that there was no shortage of products; that the markets are flooded with oil and gas and that what we're seeing in the gas prices was a result of the speculative bubble. Now, I don't know exactly why he would feel that. Do you have any ideas why he would make that statement and not be so concerned about the supply and demand issue, that the oil price is really the result of what's going on in circulation?

JIM: Now, Eric, in your first question on the central fund being a passive holding company; one thing, the central fund doesn't trade bullion. In other words, they are not trading. They raise money. When they get that money, they apply 60% to the purchase of gold, 40% to the purchase of silver and they warehouse it and store it.

As far as Bud Burrell, his comment on oil, we do know we have a lot more oil out there. We're not giving or allowing our companies access to it, whether it's the Outer Continental Shelf, whether it's the North Slope of Alaska or whether it's oil shale. In terms of what he was referring to was is what we did in the 70s when we promoted tax shelters to encourage drilling and then we reversed those tax shelters and caused those tax shelter to collapse in the early 80s and I think that's why he was upset about it. As far as speculation is concerned, the CFTC just issued a press release working with six government agencies. They did not find speculation behind the rise in oil and that report will be issued and released in September and when it did does, we hope to have somebody here on the program. [48:11]

Hi Jim. This is Scott from New Hampshire. Just a question/comment on Minefinders. I just don't get it. I've done quite a bit of work on it. I don't get the valuation of it standing alone. You know, the earnings projections for next year, the stock trades close to six times earnings and has significant reserves. I don't get when you compare to Gammon Lake, the stock has higher reserves, it's going to make more money next year and yet has two thirds the market cap. That makes no sense to me. And lastly, I just don't understand the huge short in it and the constant, you know, beating of it down by these huge block that are sometimes a third of the volume on the tape at on time. And I'm just wondering if you have any idea what's really going on, why this stock can't got out of its own way. Your thoughts are appreciated.

JIM: You know, Scott, you might want to listen to a comment I made earlier with a caller, I can't remember his name, but I'll boil it down to this. When they released their updated feasibility study in February, there was misinterpretation by one of the bad apple investment banks. They interpreted that the company was going to have to go and finance itself. In fact, that's when the initial short position came in. And then we head marked Bailey on the program and he said, “No, we're not going to have financing. That was a misinterpretation.”

And then what happened is the gold prices took off and the shorts got themselves in a big position and they were hoping to finance. In fact, I saw two press releases on Friday. One was from the firm that I think is behind this, and they still think they are going to need to do a financing and I can tell you from talking to Mark Bailey, they don't. What has happened here with the protestors was everything was delayed by a month, but they have a line of credit to take them through that. They are not going to have to do any financing, and they'll have full commercial production in the fourth quarter. And I think once the first pour and once commercial production comes in and then people are going to be looking at the production numbers, the cost numbers and especially as we move forward into 2009, and then I think the unfortunate thing is these guys have dug themselves into a trap where there is no way out in my opinion that they are going to be able to cover now because the official short position is 7 ½ million shares between both sides, both on Canada and the US side. And then there is probably anywhere from two to three million naked short position that came into play with the carpet bombing of Minefinders stock that was done from July 15th until the 18th. And the reason is that Mine Finders was about ready to break out above 12 and their short position was done somewhere between 11 and 12. So once it broke out above 12, it could have gone to 14, and these guys would be losing some serious coin. I think they are going to lose their shirts in this, but that's why they are trying to cap this. And unfortunately, they keep digging themselves deeper and deeper and deeper into a hole, and that's what's been orchestrated behind this. And it's a battle they are going to lose, and when they lose, they are going to lose a ton of money. [51:20]

Hi Jim. This is Steve up in Orange County calling. I'm reading about the Bre-X scandal in a book you recommended a few weeks ago called Mining Explained,and I'm curious after this incident took place in 1997 is there any other situations where miners have been caught salting their drill samples. I know in the investment section of the book there were dangerous signals, there were red flags that you can look for in drill results and although that's quite helpful, I was just wondering just how often that type of thing occurs and if the industry has certain checks and balances in place to hedge this type of fraud. And also with all of the controversy right now with short selling I think it's just important to remember that mining companies can also be involved in shareholders’ deception.

JIM: You know, Steve, as a result of the Bre-X scandal, Canada passed something so companies today when they want to put out a resource report, they have to put out something called a 43-101 report. It has to be independently audited. Can crime come in? I think when this phase of the bull market, when we get to the third phase and it gets maniacal, you could see fraud coming in at that point because things will be getting so silly, that, just for example some of the internet companies between 99 and 2000 where, you know, none of these companies even stood a chance of staying alive, and you may get companies going public that are going to say we are going to find the Lost Dutchman mine, and fraud could come in. Could it happen again? Yes. But the Bre-X scandal, you know, the regulators passed the 43-101 rules and made that harder to do the kind of things that Bre-X did. [52:55]

Hello. This is Doug calling from Boston, Virginia. I love your show and have been interested in your recent series on naked short selling. In light of that, I'm just curious if the government ever gets into the market and tries manipulating it by buying as anonymous buyers or something like that. Just curious.

JIM: They sure do and it's called the Plunge Protection Committee. It's been documented in the Washington Post. Whenever you hear and you're watching cable television and the market is down 200 points and then in the last half an hour 45 minutes of trading it goes up 200 points, and they say there is a large buyer in the futures pit, you see this a lot. Normally if you were going to get into the market and you wanted to take a position in the futures market because you thought the market was going to go up, you would do it very quietly. You would accumulate very quietly. You wouldn't go out waving your hands on the floor saying I'll buy at any price. Sure they get involved. The very fact we have a central bank means the government is intervening in the market by the manipulation of interest rates. [54:03]

JOHN: Jim, to closeout the program today, we got an email from Denise who listens to the program from the United Arab Emirates, and he says:

The basic term that we use for bags of circulated US silver coins from pre-1965, which obviously have a silver content are typically called junk silver and he thinks that has a negative connotation. He says we should take a page from Barack Obama's book and call it: Change we can believe in. So Denise, maybe we'll start to do that.

JIM: That's precious, Denise. And it is precious. No pun intended.

JOHN: Yes. You’re right. It is. It holds up to its mettle. We could go on for another 20 minutes here with the jokes. Next week, what are we doing?

JIM: All right. Coming up on next week, Chris Nelder will be my guest. He's written a new book called Profit from the Peak. By the way, this is a great, great book on peak oil. He takes the pros, the cons and tells you how to invest. Also August 4th, Matt Simmons will be my guest. Matt and I both go on vacation during the month of August. He's up in Maine and I'll be on the beach, and so really looking forward to that because he's been saying a lot of things that have been almost prophetic in terms of if you take a look at the number of speeches, here is a man who has devoted himself to getting the message out there. He flies all over the world at his own expense, and I want to point that out, and he's doing his best to get people educated and so Matt is going to be my guest. Also on August 9th, Jeff Christian will be joining me with the CPM Platinum Group Metals Yearbook. And then on August 16th, WD Lyle Jr., PhD and Scott Allen PhD, A Very Unpleasant Truth. So a lot of great stuff coming up, and we'll take the final couple of weeks of August off, a time where I plan to catch up on my sailing. I got myself a new spinnaker, so looking forward to catching up on racing.

JOHN: What is a spinnaker for those of us who are ignorant?

JIM: That is a big puffy balloon sail that you see in front of a sail boat, almost looks like a big balloon out in front of the boat, it's great for sailing down wind. It allows you to sail down wind at a much faster speed.

JOHN: Okay. Now, I know what a spinnaker is. All right. We'll bring in sound effects of seagulls in the background, waves breaking, tsunamis destroying things.

JIM: Although, somebody said, I just got an email because they know I go on break, and he said, “Jim, every time you take the month off of August, terrible things happen.” What was it, 2005? In fact, I was out sailing the whole weekend and we were doing a little bit of racing and gosh, it was the last couple of days before the vacation and it was Sunday night, and I was talking to my wife and I said, “let's see what's going on in the world.” And I turned on the TV and there was Katrina. And then we had a huge market selloff in 2006. And then in 2007, I take the month off and of course we had the credit crisis unfold. So a lot of people are saying, “Jim, don't go on vacation. Something bad could happen.” So hopefully that's not going to happen this time.

Anyway, in the meantime, we've run out of time. On behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend.