Has the 2014-2016 Crisis Window Been Delayed?

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Every few months or so, we devote an entire segment called On the Record where Financial Sense Newshour host Jim Puplava tries to answer a lot of the feedback—either positive or negative—regarding our views on the markets, economy, or certain sectors like metals and energy. If you didn't catch the most recent broadcast, here is an edited summary of Jim's views on a number of topics (Note: To hear the full audio, please feel free to visit the Newshour page or our iTunes podcast page).

In past broadcasts, you've identified a possible area of concern for another economic or financial crisis around the 2014-2016 timeframe. Since we are now well into 2014, do you think another crisis is imminent or has the timeline shifted in your view? If so, why?

I think the timeframe has shifted out toward the latter end and a lot of this has to do with relatively recent trends in energy. If you've listened to this show over the years, one point that we continually make is how important the role energy prices play in economic growth. We'll address this again later but for now the main point is that the massive increase in U.S. oil production in recent years, which has been quite surprising, has led to a number of positive trends: 1) it has helped to keep inflationary pressures low, which is good for consumers, transportation, and businesses; 2) it has made the U.S. a much more attractive place for manufacturing and helped accelerate "reshoring" efforts; 3) it has decreased the size of our trade deficit and helped strengthen the dollar; and 4) it has generally allowed the U.S. economy to outperform the rest of the world. Without this massive increase in U.S. oil production due to fracking and horizontal drilling, we'd be looking at much higher oil and gas prices and a very different set of circumstances: higher inflation, a larger trade deficit, a weaker dollar, lower economic growth, and less capital coming to the U.S.

You used to talk a lot about peak oil in the early and mid-2000s. Do you still believe in peak oil?

Well, it is a fact that conventional oil peaked in May of 2005 and we've never exceeded it. That kind of oil, which is the cheapest, has been declining in production as older wells, especially the giants, have gone into decline. However, since then unconventional oil has taken its place and helped prevent energy prices from shooting upwards. So, to be accurate, there is really no debate about peak "conventional" oil—the main issue now is on the sustainability and increased use of unconventional sources of oil, renewables and the like, which in general are much more expensive. Dr. Oliver Inderwildi and I recently discussed this issue in much greater detail for those who are interested (see here).

In addition to energy, and commodities in general, you also became very bullish on gold and silver in the early 2000s writing a series of articles where you argued, along with Marc Faber, that metals would enter a new bull market. You're no longer as bullish on the metals as you were then. What happened and what are your thoughts on the sector now?

It was pretty clear we were entering the final stages of the bull market once metals became the "can't-lose trade" like tech stocks in 1999 and 2000. I mean, it just got outright crazy. There was a massive disconnect between reality and expectations. People were regularly forecasting silver going to $150-$200 and gold going to $5,000-$10,000 due to hyperinflation when just the opposite was actually taking place—inflation was moving lower. This huge disconnect between the data and public perceptions along with some of the outrageous deals being made in the precious metals mining sector really reflected the mania-type mindset you always see at the end of a major boom, which is one of the reasons why we started reducing our metals exposure and even went short in 2011. Now, for the last several years, I’ve really been hammering the importance of diversification and not being overly exposed to precious metals. My main message since that time has been to seek value in blue-chip dividend paying stocks, which has been a good move.

With that said, after the economy and market stabilized post the 2009 financial crisis, you became bullish on stocks. What is the main message you're telling investors?

If you look at the S&P 500, we reached a peak in March of 2000, then went down over 40% during the burst of the tech bubble, then went back up until we got to about September of 2007 and then went back down again. So, if you think about, not until April of 2013 did the S&P 500 manage to exceed the highs that we reached in March of 2000. You can take a look at charts, I don't care if you're looking at Microsoft, Intel, Cisco, General Electric, a lot of the Dow stocks—we’ve done a number of shows on this subject—where I’ve showed that basically over 60% of the stocks in the Dow were selling at lower prices than they did 13 years ago. So the stock market really did have a long extended 13-year bear market. And if you look at many of these companies, they have higher sales today, they have higher profits, they have higher dividends, free cash flow is much larger than it was 13-years ago and the P/E multiples are not only lower, but the dividend yield is higher. So, there was already a secular bear market in stocks. By the same token, I couldn’t help but turn bullish again once most measures started to show the economy improving and liquidity moving back into the market. Along with monetary policy, all conditions were favorable for a movement in stock prices once things started to stabilize after the financial crisis. Eventually, those conditions will start to change again.

What are some of the positive developments you see taking place in the U.S. that people might be overlooking right now?

Again, at the top of the list is what we're seeing in the energy sector. Having come from the peak oil side of things, now seeing all of a sudden fracking, horizontal drilling, and this massive increase in production—who would've thought 10-15 years ago that North Dakota would now be producing more oil—over a million barrels a day—than Alaska? So that’s at the top of the list. We've talked about this as well, but just take a look at the innovations taking place today with robotics, manufacturing, and modern electronics. Lastly, when I pick up the Wall Street Journal and I see week after week major companies like Apple, BMW, Airbus and others relocating and building factories here in the U.S., that tells me something. Why are these companies returning here? Why is Apple building a new factory in Phoenix, Arizona? Why is Intel building one in the south? Why are all these companies coming to the central corridor building factories? There's something going on here that is positive. A lot of these transformative developments are taking place, but they are also disruptive.

There's been a lot of "glooming and dooming" out there and there's nothing wrong with being prepared but, then again, there's many blogs and newsletter writers living in a suspended state of collapse and imminent crisis. Over the last several years, you've really tried to move people away from this and toward a more positive view of the U.S. markets and economy.

Well, one of the biggest differences between news sites and a money manager like myself is that your success is determined by whether your views continue to align with reality over the long-term. This is just not the case for many bloggers and newsletter writers. The incentive for most media outlets is highly skewed to do whatever they can to get you to click a link, stay on their site, or keep watching. I mean a perfect example of this was in 2012 during the fiscal cliff and the financial shows were doing a countdown. They were counting the days, the hours, the minutes until the U.S. would go over the edge and all hell would apparently break loose. Yet, anybody that did research would've known that we were generating enough tax revenues to pay the debt. Now, they didn't tell you that on television—they scared the heck out of you because, guess what, fear sells. And so our firm was following the leading economic indicators, we were following financial stress measures, credit default swaps, and watching interest rates come down, all of which were signaling that this was being blown way out of proportion. So, the difference is, when you manage money you can't let your personal biases, your political views and your emotions cloud your judgment, because if you do that’ll be one of the most costly mistakes you'll make. You have to be disciplined, you have to have a methodology for when you buy and sell that drives this decision-process and not what some blow-dry says that tries to scare you. Anytime there's a potential crisis or news story, they are going to milk it for everything they can get. But, guess what, they are accomplishing their objective: you're watching or reading them and that's what drives viewers, that's what drives ad revenues, and that is something you cannot let drive your decisions as an investor.

In the rest of this exchange with Financial Sense Newshour co-host John Loeffler and Jim Puplava, Jim discusses the things that currently concern him, where the next financial crisis may arise, the "Petro Business Cycle" and its influence on the economy, and much more. Click here if you'd like to listen to this interview in full.

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