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JOHN: Well, Jim, if we get into our Financial Sense way back machine, remember you and I about 24 months ago, maybe almost 36 months ago, were talking about the fact that one night Americans would turn on their tube and everybody would be talking about peak oil: “There’s no more oil, oh my gosh, what are we going to do?” We’re taping this obviously on a Friday, last night, CNBC had the hour special Addicted to Oil. JIM: You know what really surprised me, and of course you and I were both watching this and we decided when they started advertising this earlier in the week, I was expecting a documentary to really explain the problems. For example, why are oil prices high, how did we get here, what’s the position of supply, how come we’ve had this relentless rise in oil prices? I was really expecting a documentary, an expose, in terms of how we got here. JOHN: Well, they did have good experts, too. We should point that out. JIM: Yes, they had Daniel Yergin, although his price predictions are more often wrong than they are right; and they did have an early peak oil theorist, Ken Deffeyes, who we’ve interviewed several times on this program. So I kept looking for ‘where’s the beef?’ Where’s the substance? So what we’re going to do just to give our listeners a heads up, we’re going to play some excerpts from last night’s program. We’re going to dissect it, and then we’re going to talk about what they didn’t cover and what they should have covered in the issue of oil. Now just to give an example of where we thought they were going to go with this, the opening where you really thought they were going to handle this issue in depth. Here now, Gillan Lettigen. LETTIGEN: And good evening to you. Make no mistake, it is oil that makes the world go round. Perhaps nothing underscores that more clearly than today’s turmoil, and the market today was rattled: crude oil spiked to an all time high, now $78 a barrel; escalating violence in Israel and Lebanon inciting fears that Iran will get involved and compromise one of the world’s largest oil supplies. Add to that, reports of attacks on a Nigerian oil pipeline, and you get a day like today. So what does that mean for us? – A nation addicted to oil. Filling up all those SUVs, running all those appliances, and insisting on living our lives without regard to the ultimate cost. Tonight, we’re going to defend your right to drive the biggest car you can afford, but hold your feet to the fire when you complain about an unstable world perpetually in conflict all in the name of black gold. We have assembled some of the greatest voices on oil in the world tonight – a veritable Manhattan Project for our survival guide: my CNBC colleague, energy correspondent Melissa Francis; independent oil trader Eric Bowling; John Kilduff, Senior Vice President, energy risk management FIMAT USA; and CNBC global energy analyst Dan Yergin of Cambridge Energy Research Associates Group. JOHN: Well, there we were, Jim. That was the opening, those were the credentials of the first group of experts they had. By the time they got that far I was pretty pumped, but then what did they cover, and what didn’t they cover? JIM: The thing I would have begun with is we’ve seen this relentless rise in oil prices from 2002 to where we are today at almost $80 a barrel. So the first thing I would have started out with is why are we looking at $80 oil prices, because that’s the big question. Why do we have $80 oil? And then I would explain what’s happening on the supply side, versus what’s happening on the demand side, and then I would start covering some facts that you just don’t see covered. For example, why are prices this high? Well, let’s get to some of the things they didn’t cover in the program. We have not replaced the oil that we have consumed each year since 1985. So we’re not replacing the oil that we consume. Secondly, between 1985 and 1990 –in fact Ken Deffeyes did refer to this and we’ll get to that clip in just a moment – OPEC increased its reserves by 300 billion barrels of oil without any major oil discoveries. In other words, they didn’t say: “Hey, we’ve discovered a Ghawar. We’ve discovered a Burgan field.” So what we had were political reserves that have been added to the world’s supply of oil reserves. A third factor they never covered is how come we have a situation that OPEC produces almost 40% of the world’s oil but if you look at the BP Statisical Review every single year they produce more oil and their inventory level always stays the same. In other words, if you look at Iran, Iraq, if you take a look at Saudi Arabia, if you take a look at Kuwait, if you look at Venezuela, all their oil reserves are the same in terms of where they were between 1990 and here we are in the year 2006. They’ve been producing a lot of oil in the last 15 years, and yet their inventory levels remain static and they never change. Wouldn’t that kind of raise some suspicion with you? JOHN: Well, you would think so. They also brought up the issue about reserves as well, and a couple of people were asserting that but we’ll come to that later. JIM: Let me just go on with some other things. Sixty-five of the world’s oil producing countries have peaked in discovery; 49 of the 65 oil producing countries have peaked in their production. Major production comes from major oil fields that were discovered 50 to 60 years ago, these fields from Ghawar to Burgan to Cantarell to the North Sea to the North Slope are now in decline. And the one thing is we have not announced a major oil discovery in a long period of time and these major giant fields that were discovered 50 to 60 years ago are now in decline. So if you have Ghawar, which produces 5 million or nearly 50% of Saudi Arabia’s oil production has gone in to decline, where are we finding the Ghawars, where are we finding the Cantarell fields, where are we finding the Burgan fields? Have we found another North Sea? The North Sea and the North Slopes of Alaska, that oil was discovered 30 years ago. I can’t think of any major oil discovery we’ve had in 30 years. The other thing that I think is very important on these price spikes is excess oil capacity is now reckoned to be no more than 1 to 2 million barrels a day. So you have Middle East tension; you have attacks on the Nigerian pipeline; you have kidnapping of Nigerian oil workers; or they blow up a pipeline somewhere – that has a major impact in terms of excess capacity. The other thing is there is no major replacement on the horizon to replace oil and natural gas. Solar will not power airplanes; we will not be sending rockets into space on solar. Nuclear is part of the answer, and wind turbines or wind energy or clean coal, but none of these as an individual energy source in terms of renewables has the potential or energy creating ability that oil and gas does. And the other thing, they had these oil experts but you know the oil analysts on Wall Street have gotten it wrong for the last 4 years. When oil went from 20 to 30 they said it was going back to 20; and when it went from 30 to 40 they said it was going back to 30; when it went from 40 to 50 it was going back to 40; and when it went from 50 to 70 they said it was going back to 50. And here we are, on this Friday, and we’re looking at a price of almost 70 to $78 on a barrel of crude oil. These were the things that were not covered. In other words, there wasn’t any explanation of why we are looking at $80 oil today. Let’s go to the experts, they had 3 of them: they had Dan Yergin; and they also had Michael Economides. MODERATOR: Dan, I start with you. The great fear is not that this violence itself is disruptive but that it will escalate beyond what it is and actually disrupt supply. How real is the fear? YERGIN: I think it’s a reasonable concern. We are perhaps on the edge of the seventh Mid East crisis since the Second World War, and that’s what we’re seeing the oil prices now. Combined with –beyond what’s happening in the Middle East – is of course what you mentioned before is Nigeria, which is an issue that people don’t pay enough attention to. MODERATOR: So in your view the fear is valid? YERGIN: Yes. MODERATOR: The pricing is valid, the fear is valid? YERGIN: Yes, because you have two things at the same time. You have Arab-Israeli going on, and of course you have Iran which no one sees what the clear outcome is there. MODERATOR: Also with us in Baltimore, Michael Economides, Professor of Petroleum Engineering at the University of Houston. Professor, can we engineer our way around the problem? ECONOMIDES: Perhaps yes, but you cannot ignore the politics. The price of oil should be about $40 but I think we are a couple of big headlines away from $100 oil, unfortunately. MODERATOR: What do you mean when you say it should be $40? The market would argue whatever the price is is what is should be because that integrates all the risk etc. ECONOMIDES: That’s true, let’s say if I was Deus ex machina and I could actually control all the oil production in the world, that would be the price that it should be but unfortunately all of these other influences certainly lead to the kind of prices you see today. [10:15] JOHN: But you know, Jim, they began talking about demand destruction and they felt this would be a part of this. JIM: You know it was amazing, from 2002 to 2004 there was basically disbelief on rising oil prices: “Well, you know, we shouldn’t have $30 oil given where we are today and we shouldn’t have $40 oil.” In the first two years it was just one of disbelief, it was like, “no, oil prices shouldn’t be here.” Every time they’ve gotten to $40 a barrel, for example during the first Gulf war, or the second Gulf war which happened in 2003, that prices would recede. The war was over in 1991, and the price of oil went from $40 back down to the $20 range, and especially since the US went into a recession in 1991. Then in 2003 we began the second Gulf war, it was over in about six weeks. And then everybody was saying, “Ok, the price of oil’s going to go down because the war is over, there are political risk that have been removed.” And so those were sort of the comments that were coming from a lot of the economists and the Wall Street analysts. However, then the price still continued to go up. It went up in 2002; it went up in 2003; it did not go up or come down after the war, it went up in 2004. Now, beginning in 2004, the Fed began to raise interest rates, and so what then became the mantra of the oil analysts: “You’re going to get demand destruction as the price of oil goes up. And as the Fed raises interest rates this is going to cut back on fuel consumption.” And especially, John, remember after the hurricanes Katrina and Rita last year in September when we first got that oil spike up to $70 a barrel, there was going to be this demand destruction. Here we are on Friday in the futures market the price of oil closed at $78.47. There is no demand destruction. And let’s go to one of the oil analysts who highlighted this point. MODERATOR: Even if we do go to 100, do we run the risk of a big pull back, particularly if the rising oil price drives the economy into a slowdown and you get that big and relatively sudden demand pullback. OIL ANALYST: Well, that’s what it is. It’s called demand destruction. And everyone thought when we hit $50 a barrel there would be this huge demand destruction in principle that would back off gasoline prices. It would draw crude oil down back to $30. By the way, we were below $30 2 ½ years ago. It feels like we’ve been up here a long time, right? The other thing you have to consider is if you take a $3 gallon of gasoline and you think that’s high you convert it in Europe they’re paying somewhere around 7 bucks a gallon. And you guys can speak to this a little bit. MODERATOR: But address the market risk. OIL ANALYST: Ok, here it is. Are you ready? There’s a premium for geopolitics and terror in that barrel. What is it? I don’t know – $5, $25, or $50. MODERATOR: But he says it’s $37. OIL ANALYST: $37. And you know what it may be 37 today, but it may be 57 in two weeks if Iran decides basically to continue with their nuclear enrichment program, and the UN delivers sanctions MODERATOR: If, if, if. And I could give you ten other ‘ifs’ the other way. OIL ANALYST: Yes. It seems like they really didn’t prove their case that there was demand destruction. The only thing that they really proved out of the whole thing is that we’re addicted to oil. [13:39] JIM: Yes, they had that piece of the reporter in Los Angeles that was driving in a California freeway jam, which is normal around California. You know, John, if they wanted to point out anything, it was this: we are addicted to oil. We love our SUVs. You go anywhere in Southern California, pull into a shopping center, a strip mall, I mean the parking spaces are designed for subcompact cars – you’ve got Chevy Blazers, you have a Chevy Suburbans, Tahoes, you’ve got Lincoln Navigators, Cadillac Esplanades, you’ve got foreign SUVs. I mean everybody drives an SUV. The soccer Moms are not trading their SUVs in for hybrids. In fact, even though hybrids are in demand, very few people are buying them. They’re going for a premium and most people say, “why should I pay 3 or $4,000 extra for a hybrid. I like driving my SUV.” Now, maybe they’re not selling Hummers, or the Hummer 3s, but they’re selling downsized Hummers. And the other thing is if we take a look at everything that we do with oil today, our economy –the world economy – runs on oil. Food production runs on oil: from the fertilizers that are made from natural gas to the diesel that powers the tractors and the combines; to the diesel trucks that haul the agricultural products to factories; to the energy that’s used to process the food; to the trucks once again that get them to the supermarket. Everything you see on the shelf today at a supermarket or a department store took energy to produce. [15:27] JOHN: If you’re looking at what is said here, and there is really a major disconnect because the entire world runs on this energy in one form or another, and yet at the same time we have people saying, “stop using it.” Now, there’s no bridge in here. Do you see what I’m talking about? Like, Ok, over here we use it, over there you have groups of people saying you’ve got to stop using it, stop being addicted. How? We don’t have any bridges in there right now. JIM: No, and what is completely insane right now, and we’ll get to this when we get to our lifestyles is you’ve got a large environmental movement that is stopping the drilling for oil, stopping the drilling for natural gas, stopping the building of refineries, stopping the building of wind farms, stopping the building of large solar arrays, stopping the building of clean coal energy plants. And you can’t build a refinery, you can’t drill for oil and natural gas, you can’t put up windmills, you can’t put up a clean coal or a nuclear power plant. Now, forget the fact that they’re doing it elsewhere, whether it’s China, India, Japan, Europe or elsewhere, we’re not doing it here. And we’ve had 30 years of stopping and doing everything we can to stop energy production and expansion, and that’s another issue that was not brought up in this debate. In other words, what can we do to alleviate this matter? Wel,l let’s build power plants. Well, you can’t do that. Well, if we want to keep down the price of fuel let’s build an LNG terminal since our natural gas production is going into decline. Well, you can’t do that either. Let’s build a nuclear power plant. Well, you can’t do that either. And because a lot of the world’s light sweet crude which is the easiest to process is really past peak production, a lot of the world’s oil now is that heavy crude and you have to have special refineries to process this. That’s why we need more modern refineries to process the kind of oil that we get from these heavy crude areas, whether it’s Saudi Arabia or Venezuela or the Canadian oil sands, or oil shale. And it may also make some sense to build some refineries in an area [unlike] where 40% of our refineries are in the path of hurricanes. You can’t do that. And so there’s this inconsistency of this lifestyle that at least a couple Senators are starting to realize, the only thing America has done on the energy front is just import more and more oil from a lot of people in the world that don’t particularly like us. And this is leading us into a very uncomfortable situation as a nation. And let’s go to the Joe Lieberman comment, because he hits upon it directly. MODERATOR: I want to get everybody’s response to a couple of interesting thoughts on oil. The first one comes from Tom Friedman who is of course a writer for the New York Times. It goes like this, he says: Our military – he’s talking about the US military, obviously – is in a war on terrorism in Iraq and Afghanistan with an enemy which is fueled by our gasoline purchases. So we are financing both sides in the War on Terror: ours and the enemy’s side. And then today in an op-ed in the New York Post from Senator Joe Lieberman, he wrote the following: Our dependence on oil means that the Royals in Saudi Arabia, rebels in Nigeria, Mullahs in Iran, or Venezuela’s anti-American President, Hugo Chavez, all have an outsized power over our nation’s destiny. [19:09] You know it was amazing John and you and I both just about fell off the couch when we saw this. Here is a show talking about our addiction to oil, and let’s run and one of the commercials when I saw this I had too many belly-aches of laughter. Let’s play that commercial. First Woman: Umm, I’m sorry, Jake was next. Second
Woman: Yeah, well, we’re next now. And I should also explain that here was a Hummer commercial in the middle of Addicted to Oil [20:01] JOHN: So here we are right in the middle of Addicted to Oil and they go into it with this big promo, Jim, “this is your CNBC survival guide.” And wham! A Hummer commercial. JIM: I saw that, and you know the Hummer commercial is a little bit more subtle than that. I don’t know if you’re listening to this program. You’ve got a mother and her kid and they’re waiting to get her kid in on a slide or a swing on the playground, and this other mother and her kid cuts in front of her. So what does the mother do that feels slighted? She goes out and buys a big Hummer: “I’ll show you. I’ve got a bigger Hummer.” JOHN: It’s like fried green tomatoes, because I’ve got bigger insurance than you – I’m older. JIM: You know, “you ain’t going to bully me no more I got a Hummer.” The irony of all of this and getting to the gist of this addicted to oil which is something I think they should have done a better job of explaining: we love the lifestyle that we lived that has been brought to us by energy, and especially oil. We have a wide variety of goods on the manufacturing shelf today, whether department stores or food stores that are all made possible as a result of oil and natural gas; we love our mobility, we like to have motor homes, we like camping, we like our outdoor vehicles, we like jet skis, we like motoring, fishing – all of this runs on fossil fuels. We love our temperature controlled environments. If you live in the East and it’s cold outside you turn on the heat, you burn heating oil. If you live in the Southwest and it’s hot outside you turn on your air conditioning. We love travelling to anywhere in the world; getting on an airplane, taking a vacation, going to Europe, going to the Far East. We love the variety of foods that we see in the grocery store, or what we can order in restaurants regardless of the seasons of the year. Basically, you can enjoy fruits and vegetables all year round today regardless of the seasons. We love this lifestyle, John, but here’s what it boils down to: we just don’t like what produces this lifestyle. We’re involved in very self-destructive behavior. As all the things I just mentioned are made possible by an oil dependent world, the lifestyles we live, we don’t want to produce it. And so we’ve got into a very self-destructive policy in terms of stopping energy production, yet we don’t want to stop the life we live. And I think the cut that Economides said I think really puts it into perspective: ECONOMIDES: I think they are both correct to some extent. And of course we do have an answer ourselves: why don’t we drill more for our own oil? I think the American people – Americans in general – like I think $75 oil otherwise we would be drilling offshore everywhere we can. [23:01] JOHN: That was rather a poignant comment, wasn’t it? If we like the lifestyle we’d go do this, but what we’re doing is going in two different directions. JIM: Yes, on one hand we want to maintain the style that we live, on the other hand we want to stop anything that would help perpetuate that type of lifestyle. They took a poll of the audience and they said: “what would cause you to change your lifestyle, $3 gasoline?” A few people raised their hands. “$4 gasoline?” A few more raised their hands. And then finally he said, “$5 gasoline?” And everybody raised their hands. And I think that’s what it’s going to take. It’s going to take an energy shock, maybe $85, $90 oil. We’re heading for $4 gasoline here in California, don’t be surprised if we see $5 in the next year, you’ve got people like Jim Rogers and basically people like Yergin and Economides that are saying we’re only a few headlines away from $100 oil. And with $100 oil they can bash the oil companies all they want, but if the world market price is $100 oil and you’re importing 60% of your oil and 70% of your total energy needs, the price of energy is going up. Now, they did touch upon something that I thought they would have paid a lot more attention to. Let’s listen to the debate on peak oil. MODERATOR: How soon will we run out of oil? Here with us Red Cavaney, President and CEO of the American Petroleum Institute. Joining us from Trenton, Ken Deffeyes, Professor Emeritus of Princeton University, and author of Beyond Oil: The View from Hubbert’s Peak, and again CNBC global energy expert Dan Yergin, Chairman of Cambridge Energy Research Associates. Ken, what’s the answer, when do we run out? DEFFEYES: Well, I’m the chief pessimist around here. I predicted two years ago that world oil production was going to peak on Thanksgiving Day, 2005. And then after the 2004 and 2005 production numbers came in I had to revise that – I missed by 3 weeks. So December 16th, 2005 and I’ve been recently challenged: “OK, give me the uncertainty.” Well, alright, it’s anytime between Mid-November of 2005 and January 6th 2006, but my line is my career as a prophet is over I’m now a historian, looking back at the world oil peak. MODERATOR: I presume my friend from the American Petroleum Institute you might beg to differ. Or at least, explain why that may not be as alarming as we’ve heard. CAVANEY: Well, historically there’s been cries of peak of oil since 1874, and in each instance, almost year by year we have had more reserves which is new oil found, greater than the amount that was used, and so that continues to grow. Right now, there’s 1.2 trillion barrels of known recoverable liquid that’s identified and it’s technology what moves this and we’ve got a lot more we can find with technology. MODERATOR: What do you say to the reserve argument, Ken? DEFFEYES: Oh, a lot of them are lies because OPEC countries changed their rules from production capacity to reserves, and suddenly in the mid 1980s almost all the OPEC countries doubled their reserves. They didn’t find any new wells, [they] didn’t find any new fields they just doubled their reserves. They’re political numbers, and we can’t take those as facts. I can’t drive my pickup into the filling station and say, “fill her up with reserves.” MODERATOR: What’s the truth, Dan? YERGIN: Well, the truth is – we’ll know the truth in 50 years. MODERATOR: Is that the timeframe though? YERGIN: Well, this is the fifth time that we’ve run out of oil since the 1880s. The US Geological Survey has much higher numbers for recoverable reserves, and I think as we’re seeing today. Now, what also happens is technology, things that were not considered oil like oil sands from Canada – tar sands – become commercial; gas-to-liquids, lots of technology continues to open horizons, but I think as you’ve said in the first part of the show the things that is a real problem is what’s happening above ground, not below ground. [27:16] JIM: You know, John, it was interesting to hear Ken Deffeyes say something that I alluded to earlier when we started this program – what they didn’t cover. And what he’s referring to there is the 300 billion in reserves that were added in 85 to 90 by OPEC countries that had no basis in fact. Matt Simmons has often referred to this too. These were political reserves, they don’t actually exist in reality. There were no oil discoveries that backed them up. And yet these figures are quoted every single year in the BP Statistical Review, even though BP will have some footnotes that basically say, you know, we’re not totally responsible for some of these numbers – because every year, it doesn’t matter how much Saudi Arabia pumps out of the ground, how much Kuwait or Iran, Iraq, Venezuela, their reserves never change. And here’s something that was interesting. At the ASPO conference – which is the Association for the Study of Peak of Oil – in Australia, Dr Ali Bakhtiari, who used to be the head of the Iranian oil company told the Financial Service Institute in Australia, he estimates that oil production will fall back from today’s 84 to 85 million barrels per day, to 55 million barrels per day by the year 2020. I mean, I don’t know if people grasp the significance of what that would mean to the world economy when that happens. And I think we start that decline here in the next couple of years because, as I go back to mentioning before, we haven’t had a major oil discovery since the late 60s – that was the peak of oil discovery; and all 65 oil producing nations in the world are past their peak oil discovery. And as I mentioned earlier, 49 of the 65 countries have peaked in production. We are not replacing the reserves that we consume each year, and that has been consistent. The last year that we actually discovered enough oil to replace what we were consuming was 1985. So we’re over 2 decades now that we haven’t replaced reserves. [29:35] JOHN:Yes, but obviously the real question you have to ask, and it’s pretty obvious especially for optimists, “where’s the beef?” Where are these reserves? How much have we verified that is really there? JIM: Matt Simmons referred to even natural gas discoveries where everybody says, “well, if we start running out of oil we’ll start converting to natural gas,” and he said, “well, there’s a big assumption made on these natural gas reserves is they haven’t been discovered they’ve just been assumed that they’re there.” They’re almost like the same kind of numbers that are assumed that, in other words, the numbers that OPEC produces every year everybody assumes those numbers are there. Despite the fact that we have been spending billions and billions of dollars over the last 5 to 10 years – actually the last two decades – despite all of that there has been no major oil and gas discovery since the late 60s. The last two major oil discoveries were the North Sea and the North Slope in Alaska. The last big, big oil field which is Ghawar –which is the king of kings as Matt Simmons calls it – that was discovered 60 years ago. In fact, Petroleum Review did an article in this month’s publication and the title of that article was called 2005, the year big oil went ex growth. And they talked about of the 22 companies that account for 26.4% of global production collectively achieved oil and liquid growth of just ½% over the last 3 years. Well, for natural gas the 22 accounted for around 27% of global production, and achieved a collective growth of just 1.1%. The only large major that increased its production –as their Russian reserves come on stream – was British Petroleum. However, you have a situation for example, like Exxon-Mobil whose growth went from 2.2% in production in 2004 to a 1.9% decline in 2005. You have the third largest, or what used to be the third largest producer, they’re now number 4, Royal Dutch Shell, it saw its production decline 5.3% in 2004, and then 7.1% decline in 2005. And you remember the writedown scandal at Shell where they basically had to write off or write down 20% of their reserves. And what was amazing, whether you were looking at the top 5 or top 10, you’re just not seeing the growth in production of these major oil companies. And not only that, you’re seeing production declines in Venezuela, you’re seeing production declines in a lot of the Middle East producers. And John, you remember, when Saudi Arabia at one time had the ability to move the markets. If the price of oil would move from let’s say, $20 to $30 a barrel, they could hold a press conference and say, “we’re going to produce an extra 2 million barrels a day, we’re going to flood the markets” – and the price of oil would drop. You know what? They stopped doing that because every time they did it, nobody believed them, because they haven’t increased their oil production significantly. I think it’s somewhere around 9 ½. And the Saudi’s right now are scrambling trying to tie up every drilling rig they can in order to go after their heavy crude oil, in the hopes that they can arrest the decline in their major oil fields such as Ghawar. [33:16] JOHN: Which also accounts for why they’re beginning to contract with platforms out of the Gulf and move them over to Saudi Arabia. JIM: Sure, because not only are the Arab producing countries willing to pay a lot more than what a driller could get in the Gulf of Mexico, but they’re also willing to pay those rates and tie up contracts for 3 or 4 years. So, for a driller, you can tie up a drilling rig at a high price for 3 or 4 years. That assures your profit potential, that gives you the leeway to spend some extra money to go out and let’s say build or order another drilling platform. [33:53] JOHN: You know we’ve gone from a point here where say 40 or 50 years ago we were producing a lot of our own oil to the point where we’ve become dependent. One of the other issues, which only a limited number of people are really looking at is the strategic implication of this as far as security. If you are forced to operate a military for whatever reason, and you’re forced to do so with oil rather than with other energy sources what happens if you can’t get that from someone? JIM: You know this is what happens as US oil production peaked in 1971, US strategy was simply signing treaties, aligning ourselves with Saudi Arabia – the largest producer – and we just simply imported the oil into this country. And it worked for a while, but now we’re really getting to a situation where we’ve got a lot more players in the world today. You’ve got China, India a lot more people that the oil producers can sell to than the giant US market. And I think that the problem that you have is that the US is becoming increasingly vulnerable as Lieberman was talking about. For example, we’ve been trying to diversify our oil imports so we’re relying on Latin America. The problem is if we take a look at Latin American oil production there are mainly only 2 countries of any significance when it comes to oil reserves in Latin America. One would be Venezuela, whose oil reserves are estimated to be around 79 billion barrels; and also Mexico which is about 11.8 billion barrels. We import right now on average about 1 ½ million barrels of oil a day from Mexico, and about 1.2 million barrels a day from Venezuela. However, since Chavez took over and fired the oil workers and put his cronies in, Venezuelan oil production is down about 45%. So it’s unlikely that production is likely to increase because of the way he’s running the oil business. In other words, he’s using a lot of the oil revenues for social programs and to further his political ambitions rather than reinvesting in the oil industry. In fact, there was a Bloomberg story this week that said Venezuela’s oil sales to the US dropped as Chavez sends more to Asia. And I’ll just read a couple of lines from this: Venezuelan oil shipments to the US fell 6% in the first 4 months of the year as President Hugo Chavez followed through on his plan to find new markets for his crude. Here you have to question sometimes what he’s doing. For example, just during the first4 months of the year Venezuelan oil production have declined from 190 million barrels of oil to 178. And it costs Chavez $3 a barrel in cost to transport the oil from Venezuela to China because a lot of these big heavy oil tankers can’t go through the Panama Canal. So it’s costing him more to send his oil to China than it is to send it up to the United States. And the other thing is if Venezuela is cutting back then that leaves Mexico, and Mexico’s oil fields have gone on into decline as we talked about last year on the program – their principal field, Cantarell, is going into a long term decline. In fact, they’re estimating in the next 3 to 4 years Cantarell oil production may decline as much as 30 and 40%. So, John, increasingly we are becoming more vulnerable and it doesn’t leave us with too many choices. So what I suspect you’re going to see is the price of oil – the only way that they can reduce demand this time is to kill the economy: just put the US into a depression, or put the world economy into a depression. Yeah, that would [add some slack to] the price of a barrel of oil, but the problem is today there is not much slack in the oil and energy complex. When you have problems in the Middle East, if you have Iran threatening an oil embargo, or using oil as a weapon. If you have a pipeline in Nigeria where they blow up a pipeline they capture or kidnap oil workers or you have Chavez threatening to reduce his production that creates tight oil supplies. So what I’m waiting for next, and we’ve talked about this on the program, one day we’re going to wake and instead of see Addicted to Oil, the program headline is going to be peak oil, but the problem is when peak oil arrives it’s really too late then we go into an emergency mode. [38:52] JOHN: Alright, Jim, as we always do we try to bring everything back down to the topic of the show which is basically: what does this do for the investment environment? JIM: Well, if you heard some of the people question in terms of what to invest in. First of all, every investor should have energy stocks in their portfolio whether it’s an integrated oil company, or it’s a heavy Canadian oil sands company. I also believe you should have some of the NOC companies that are growing as we talked about in the second hour with Valerie Marcel. Some of the companies, for example, like PetroChina have grown their reserves and production far faster than some of the big western oil companies. I think owning some key oil service companies because as oil production diminishes as we just talked about last week, where oil rigs are being pulled out of the Gulf of Mexico because they can get higher rates and long term contracts in the Middle East or in the South China Seas, or in West Africa – there’s going to be demand for more oil rigs and we’re going to have to start scrambling here. So every investor should have some form of energy in their portfolio and it should be overweighted in the portfolio. And forget all the people on Wall Street that are telling you that, “well, if the economy slows down there’s going to be demand destruction.” We have not seen it at this point. As this show originally started with – Addicted to Oil – the world economy runs on oil: our food production runs on oil; everything you see in the grocery store; everything you see in the department store is brought to you is made by, is transported by oil. We are addicted to oil. There’s nothing to replace it. So keep your energy stocks, and in fact I think you’re going to see some of the most blown out earnings you’ve ever seen as 2nd quarter earnings are going to be reported here in the next couple of weeks by some of the majors and the oil companies, because remember, for almost entirely throughout the 2nd quarter oil prices were above $70 a barrel. Add on weakness, hold them for the long term because this is a world addicted to oil, and there’s nothing to replace it. [41:19] Has the recent slide in the stock market got you on edge? Does your stomach do flip flops every time your stock drops? Well, stop going bananas over your stock trades. 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JOHN: Now just when you think every thing is wonderful and fine, Jim, along comes – I’ve heard one person call it – a non-linearity in world events. I guess you call it an exogenous event, meaning something that is outside of the direct area of economics, but it intrudes itself right in there. And we’re now looking at what some are calling anyway the potential for being the seventh Middle Eastern conflict. JIM: We’re going to get into that in just a moment when in terms of the broader implications of what’s going on in the Middle East. But John, one of the things that you have to look at, we’ve had what – seventeen Fed rate hikes that have taken the Federal Funds rate from 1% to 5 ¼. It’s widely expected at least in the futures market now the Fed will go one more time when it meets on August 8th. Not only is the Federal Funds rate at 5 ¼, but any time in the past that you’ve seen the Federal Funds rate cross over the 10 year Treasury note yield –which today this Friday closed at a yield of 5.06 – that has signalled the end of a Fed rate raising cycle. And that’s where we are right now. And unless Bernanke is crazy, we’re just about done, because we not only have an inverted yield curve, but you’ve got the 1 year Treasury note yielding basically 1 basis point below the 6 month yield; you have a steep inversion that begins after the six month all the way down to the 30 year which is roughly at 5.11. So once again, unless the Fed is nuts – I mean this car is hanging over a cliff: you’ve got oil prices at $78; you’ve got a war in the Middle East. You know, you almost have to be insane if he continues along these lines. What I think is going to be different though, in terms of where we are right now, is if the Fed goes on pause and the economy starts to weaken, the Fed is not going to be as quick this time to lower interest rates I think they’ll continue to pump the money supply keeping rates high. But they do not have the same leeway as they did in 2002, especially after the events of 9/11, and the recession of 2001 – because once again, we were dealing with $20 oil, we were dealing with 250 gold, we were dealing with 60 cent copper. Well, just take a look at where gold is today. It’s well over 600. Oil prices close to $80 a barrel. So I think if they were quickly to start going to an easing mode you would have some problems. So the Fed is no longer as flexible, no longer do they have the leeway to slash interest rates in the same way as they did from let’s say the end of 2001 all the way going into 2003. And the inverted curve is a profit killer for the financial industry. You take a look at any financial intermediary from banks to consumer lending to mortgage lenders: it’s costing them more in terms of what they’re having to pay in short term funds than what they can actually earn in terms of long term rates. So what I think you’re going to see right now is one of the problems that we have compared to let’s say the recession of 2001 is the magnification of leverage that is in this field. This cycle leaves very little room for the Fed to err. And I mean if they push the car off the cliff, real estate goes into major downturn, the stock market crashes they are going to get the blame for this and their independence may be questioned. John, let’s run the cuts from the last time Bernanke was on Capitol Hill, and it would be interesting if we get the same kind of questions and concerns from the Senators when he testifies next week or if they are of even greater concern. Senator Sarbanes: Of course inflation expectations will remain low only so long as the Federal Reserve demonstrates its commitment to price stability. And the question I want to put to you is in order for the Federal Reserve to demonstrate its commitment to price stability is it necessary for the Open Market Committee to raise interest rates 25 basis points every time they meet. Bernanke: No, Senator. [47:26] Just as we just heard, John, where you had Sarbanes basically saying, “look, is this going to become habit forming? You’re going to drive the economy into a ditch.” Imagine what kind of questions Bernanke’s going to get when he’s on Capitol Hill when you see real estate rolling over; you had a negative retail sales report; big ticket items on the consumer level from automobiles to luxury goods from boats – Brunswick reported earnings this week, they missed their estimates. Brunswick makes the Bayliner boats and Mercury Marine. Their earnings were off by a buck. Boat sales have just gone off a cliff. That’s probably a combination of it costs more to buy a boat because of the materials like fiberglass that are used in it; it costs more to run a boat; marina fees are up; interest rates are up; fuel costs…I mean you name it. All of those things are rolling over. What you have now is what typically occurs as an economy heads into a recession. Usually the first thing to go is real estate, that’s what’s happening now. It didn’t happen 2001 because the Fed created a bubble. But this time around real estate is leading us into a downturn. Big ticket consumer items – automobiles, small airplanes, boats – that’s turning down; we’re now starting to see the retail sales numbers turn down; you’re starting to see layoffs –Intel announced they’re going to layoff 1,000 managers; you’re starting to see layoffs in the construction business, in the finance business and the retail business. These are the kind of things that you see starting into a slowdown. And I think what we’re also starting to see is all of this leverage that has been in the financial system –that’s been borrowing and speculating in what I call high beta trades – that is what is in the process of being unwound now. So the high beta trades from junk bonds to emerging markets to mid cap or small cap stocks, a lot of that is in the process of being unwound. So here we have the Fed cycle basically taking us into a downturn. Now we’ve got to talk about some of the geopolitical aspects that are also now starting to surface and this changes the whole dimension. [49:47] JOHN: Yes, that would be the normal issues we’re talking about as far as the Fed is concerned but now let’s look at what’s going on in the Middle East. Obvioulsy everyone’s been talking about this being war number 7, in the ongoing series since 1948. And no one at this stage of the game is really sure how far this is going to be. I mean it’s Israel’s determination to basically stomp out Hamas and Hezbollah and say that’s it, we’ve had it with these groups, etc. And at the same time, there are reports of people running into Gaza from Egypt thinking that this is it, we’re going to do it now, etc, etc. So this has a major impact because the global nervousness index so to speak goes up. And you talk about it being the emotional penalty on oil based on what we see happening there. So the reason’s everybody’s nervous is nobody’s really sure where it’s going to go. JIM: Well, I think that one thing we’ve gotten a clue for example one of the most important that’s not really been picked up in the press is Israel is calling up its reserves. If this was just a short term military strike they wouldn’t be mobilizing their reserves. In fact, in Israel I think if you’re under the age of 40 everybody can be called up. The fact that they are mobilizing their reserves indicates this is moving beyond retribution. [51:09] JOHN: Yeah, tit for tat type thing – it’s not that anymore. JIM: And then the other thing too is the world quickly forgets, if you’re in a neighborhood in Israel and your neighborhood gets bombed at night with rocket attacks from Hezbollah, if you’re going to get bombed or if rockets are going to fall on the Israeli border, there is now a greater incentive for Israel to move the battle lines forward into enemy territory. In other words, shift the battle away from its borders and go on to the attack. And that’s what I think you’re seeing them do. The reason I think that’s going to happen next is the fact that they’ve mobilized. I mean that is pretty serious. And if they can go pretty deep into Lebanon, the Bekaa Valley, take out all of Hezbollah’s power and control structure this has a much broader implication. In other words, that may be the headlines that occupy the news stories here over the next couple of weeks. [52:00] JOHN: Yes, not to mention the connection that will be then tied in with what’s been going on with Iran during this past year or so as far as nuclear issues, and how far it will go, and how people will push what. And there’s a lot of unknowns. There were a lot of unknowns if you remember when Desert Storm I broke loose, it was just a giant unknown. Nobody knew where we were headed with it at that time. JIM: Sure. And we’ve got a number of things right here because we know Iran and Syria are supporters of Hamas and Hezbollah. And so as Israel goes on to the offensive and mobilizes its army and its troops and goes on attack deep into Lebanon – the Bekaa Valley – this also exposes them to attacks by Syria. So unless they get some kind of assurance from Syria that they stand down, if they don’t get that assurance then the war broadens and then what happens is Israel attacks Syria. And if they attack Syria –meaning they go after Syrian air bases – then this war has a much broader implication. And then of course there are rumors that a lot of these prisoners that have been captured both by Hamas and Hezbollah will be transferred to Iran. If that happens then the situation in Iran develops into something much deeper. And it was amazing there were a number of articles in this month’s Petroleum Review and one of them was called: Thinking the Unthinkable. And really, what it’s talking about if the US makes a run at Iran, in other words, we can’t resolve this on a diplomatic basis we’ve tried everything that we can then the US contingency plan –and plans are being drawn up – would include tactical bunker buster nuclear devices known as BG111s. These devices would neutralize underground Iranian nuclear sites as well as take out specifically the heavily reinforced underground Uranium enrichment complexes. And they also may take out the missile complexes around the Straits of Hormuz. In other words, instead of just flying in F14s, F18s we’re talking about much more serious weaponry. And this has much, much wider implications than what people are talking about right now. I think the fact that the media has missed out on the fact that Israel has mobilized its army tells you that this is going to a war footing. [54:34] JOHN: And obviously the first squeeze would be in the area of petroleum prices which then affect the economy directly. As we say, the economy is addicted to oil, it doesn’t run without it, every time there’s a shift in the price of oil it affects everything else. So, that’s the squeeze on the economy. JIM: This goes back to Addicted to Oil comments that Michael Economides made that we’re only a few headlines away from $100 oil. So if this war escalates as I think it’s going to do, which is what is implied by full mobilization of Israel, when a country mobilizes its military that tells you something in terms of where it’s going. [55:21] JOHN: Well, here’s the big question then. Given these exogenous events –those taking place in other parts of the world that will affect our economy directly – the other variable in this mix is whether or not the Fed is going to be dumb enough to try to tighten it anymore next time they sit down to look at what the rates are going to be. JIM: I think at this point that the Fed tightening cycle if its certainly in the last inning may be over. In other words, if you’ve got $4 gasoline on the horizon here as a result of oil prices approaching $80 a barrel; if you’ve got oil supply being taken off in Nigeria; you add a Middle East war; and you throw on top of that the Fed continues on a hawkish bent with markets rolling over as they are right now – this is the kind of stuff and stupidity that gives you a depression. And I think there would be some very big calls by government in terms of “what the heck are you doing.” So I would guess that we are probably in the final inning of the Fed’s rate raising cycle because there’s just too much risk. It’s not just the fact that it’s getting more expensive for Americans – the average mortgage in this country has gone up about $400 according to the American Bankers Association. So you’ve got rising interest rates, you’ve got the economy that’s rolling over, the stock market is rolling over, retail sales are rolling over and you want to keep hiking? That would be absolutely insane, so I think we’re very close to the end. [57:00] JOHN: You forgot to put taxes in there too. One of the most interesting reports I read recently while taxes are going up, like property taxes, and homeowners are beginning to scream about it – states are awash in cash. That’s one of the dirty little secrets. JIM: They’ve been making a fortune as a result of the real estate bubble because even though California has Prop. 13 but think about it. Let’s say you bought a house for 3 or 400,000 a couple of years ago. I was talking to a banker in an area we used to live in a rental until our current house was built and these homes were built about 1998, and they were around 300-330,000 when they were built, they’re now going for like 950 and $1,000,000. So think of people that bought in that development, sold their house, they bought it for 330 and sold it for 900,000, think of what happens to tax revenues when the new owners who bought the house at 900 are now paying 1.5 or 1.8% of 900,000, versus 330[,000]. [58:02] JOHN: But in some states the current property owners who have not transferred title, [or] sold the house, the states charge at the current valuation not what the owners bought it for. And we had an op-ed piece in a local newspaper in our part of the country that said, “latest tax notice constitutes eviction notice,” because people now that say bought homes to retire in at very reasonable rates 10 or 15 years ago can no longer afford to stay in those houses. So, I mean you have a revolt coming on the other side too, and all of this is coming together at one time. I mean you could even call this a perfect financial storm but somebody already did that, so we don’t want to do that. JIM: You know John, you’re absolutely right, it’s not just that interest rates are going up, energy prices are going up, people’s property taxes are going up and yet you still have idiots in Congress that are saying if we’re elected we’re going to raise taxes. That’s not going to fly. But what all of this does imply now, bring in the geopolitical dimension, bring in $80 oil, bring in a war in the Middle East, and in my opinion the Fed cycle is going to end here. It has to because if they don’t they’re going to push this car over a cliff if they haven’t already. Well, let’s move on to Other Voices this week, we’re going to give you a totally different perspective on the financial markets. My next guest says we’re headed for a crash in the stock market. He uses a combination of both technical analysis and astrology. Now, we take a look at all kinds of views on this program. My guest is going to be Arch Crawford, he’s appeared on CNBC, Adam Smith’s Money World, The Nightly Business Report, The Wall Street Journal Report, Good Morning America, ABC’s 20/20, and Geraldo; he’s been hailed by Kiplinger Personal Magazine and Hulbert’s Financial Digest, as well as Barron’s. In fact he was ranked number one in Timer’s Digest in the first half of 2002. And we like to play all kinds of views here, to give you both sides of the story, here’s a very bearish one coming up next. [1:00:12]
JIM: Joining me on Other Voices this week is Arch Crawford, he’s been editor and publisher of Crawford’s Perspectives for over 20 years. Arch cut his technical analysis teeth as first assistant to top Wall Street technician Robert Farrell at Merrill Lynch. And it’s been said by Kiplinger Personal Finance to be one of the only market timing newsletters that’s beat the buy and hold strategy. Arch, why don’t we begin with your take on the markets. Right now, the Dow is still up 2 ¾, the S&P has a slight gain, the NASDAQ looks like it’s heading into a hole though – down 5%; the bond market seems to be rallying a little bit. Where are we? ARCH: We feel that a large top pattern has been forming over a good many years. And we had a major top form in the major indices. And then 2001, 2002 came along and dropped us down for the first major leg of the Dow. Now, the rally back up took longer than expected, going from October 2002 and double-bottomed on the March 12th, 2003. And it’s been up until this May, I think the second week of May – 8th, 9th, 10th, along in there – we were hitting new highs for the rally in most of the major indices. And I was actually speaking in New York to the market technician’s association, on May 8th and to the clients of Bloomberg Newsgroup on the 9th, and I was saying I thought both the stock market and the gold market would top right about now. And the decline was rather harsh, a little faster than normally would be expected; and it did more technical damage than the first leg down would normally take place without breaking down out of the major patterns, which we’re appearing to do – like this week. [1:02:20] JIM: If you were to look out 3 months, 6 months from now, what’s your best take on where you think stock prices will be? ARCH: Well, we are in the 4 year presidential cycle, the second year of that cycle is the worst year. We are in the worst portion of the year in terms of the seasonal pattern. We have high PE ratios and very, very low dividend yields on the major stock indices, so I think that that is a set-up for disaster. But then [what’s] coming along is from my own work with the planets: that there is a Mars-Uranus cycle, during which a certain phase of it, every major decline in the stock market of the last 100 years has taken place in the same portion of that cycle. And in this particular phase of it, [it] begins August 13th and ends the next March 27th of 07. So, we’re looking for a much bigger down year than usual even on the 4 year cycle, so it should be quite negative and we believe it could crash in the timeframe of the normal seasonal weakness which would be September, October, November. The Bradley model which is entirely astronomically derived hit a high on May 18th this year, and will bottom out on November 27th. And that is merely a measure of aspect power between 2 planet pairs. And whether it’s traditionally configured to be favorable or unfavorable – so we take all of the favorable aspects and subtract the unfavorable aspects, and that creates a line which peaked on May 18th and bottoms on November 27th. And that does not work all of the time, but when it works it’s quite unusual, and frequently calls turns to the day. The rest of the time it’s a mish-mash and is generally meaningless, unless there is a great deal of activity in the sky and it tends to increase its accuracy. [1:04:40] JIM: You and I were talking just before we went on the air about the possibility of a stock market crash in this timeframe – and especially as we head out in to Fall. And usually when those things happen there’s usually something that hits the market or strikes the market. So, maybe we get a bad inflation report, the Fed goes beyond, let’s say, August, tightens again in September so you now have a discount rate at 6 ½% and a Federal Funds rate at 5 ¾. You know, Arch, historically, any time the discount rate has gotten to 6% we’ve headed for toughter times both for the economy and for the stock market. Do you think that’s the likely course for this time too? ARCH: I think that’s probably likely, yes. We are running the same pattern as 1987 in that the dollar has been very weak, it’s made the worst pattern in the technical analysis chart books – like a diamond formation – broken down out of it, and it’s now rallying back up to a heavy resistance point, another point or two higher on the dollar index that’s traded (that’s against the basket, not against the euros). It’s holding in the area of 85 to 86. [1:05:51] JIM: I wonder if you might explain to our listeners, Arch, for some people that may not be familiar with the work. You combine technical analysis along with astrological type analysis. I wonder if you might explain that philosophy. ARCH: Yes, I was assistant to the technical analyst at Merrill-Lynch in the early 60s, when an article came out on the front page of the Wall Street Journal about people who were calling the market using astrology. And I thought that’s a hoot of an idea, but you know, hey, I was young and impressionable and I was looking at everything that had anything to do with predicting the stock market. I was staying at the Merrill-Lynch library, which was second only to S&P in terms of business libraries, and running all kinds of figures – moving averages – on all the data from Barron’s and the Wall Street Journal. And so I wanted to know what made things move, and what gives the indications, and here’s this article saying these people were doing very well in the market using astrology. So I went down to Weiser’s [ph.] bookstore on Broadway and bought astro economics booklet done by Lieutenant-Commander David Williams. And next to that was a book called Stock Market Prediction by Donald Bradley who had made a complex model a way to look at the planetary interactions and project from that what the stock market might do. He wrote it in 1948. He’s long dead now. Lieutenant-Commander Williams was alive for quite a few years after that, he finally died in the 90s at 92 years of age, but he was head of the purchasing department of Con Edison in New York for 40 years, and a Lieutenant-Commander in the big war, so he was no Johnny-Come-Lately light headed crazy. He was a very substantial person in the financial and economic community and he knew what he was talking about. He later expanded the astro economics booklet to a full book sized called Financial Astrology. And I recommend that for people who are interested in to getting into that sort of thing as a very throrough background to cycles work in general, and astro-cycles in particular. [1:08:16] JIM: Arch, given this possibility, let’s say the Fed goes too far, this triggers something the Fed isn’t expecting because everytime the Fed meets everybody’s looking hopefully, “are they going to push it too far or are we about at the end of this?” So you could certainly see a scenario where they go too far. Now, after that, let’s say you’re talking about a stock market crash a la 1987, the consequences afterwards we have central banks raising interest rates in the US, you have central banks around the world raising interest rates from Europe to now they’re talking about Japan possibly this week. And Japan is barely coming out of their deflation; Europe is barely growing. Do you see this hyperinflation that you’re talking about taking place next year as a result of the central banks responding to a stock market crash, and then perhaps a major recession? ARCH: Probably. The clarity to me is this: we’ve just gone from a series of Jupiter squares to Neptune which is highly inflationary, and we are moving towards a Saturn opposition to Neptune which is highly deflationary at the end of August. So I believe it may be the interest rate which is attacking the inflation widely by the end of August, and causing a sharp decline in financial markets. And then there will go into a possible greater inflation in order to work against that. There will be a temporary rally maybe during September, and a further crash in October, November – looking at the planetary lines. And it may be that Saturn opposition to Neptune is a clamp down on inflation – that’s the literal meaning of it in astrology books. [1:10:10] JIM: If this event takes place, the stock market crashes, the economy goes into a recession you almost see a hyperinflationary response, because in the last recession and stock market drop between 2000 and 2002, then the recession of 2001, they lowered interest rates to such a point, and rather than like most recessions where consumers would refinance, pay down debt, and build up savings, this time the consumer went all out, raised their debt levels, so I’m not sure what they’re going to use to bring this back if they blow it this time. ARCH: Well, that is a problem and it’s a long term problem and looking at some very long term trends I feel they could change the courses of governments and general levels of economic structure, and also the amount of economic cooperation as these things begin to break apart. Everybody’s going to move in and jump up their tendencies towards protectionism which causes further contractions in international financial arrangements. So, it kind of feeds on itself on the upside with the dot-com bubble, and all of that sort of thing, and it could very well feed on itself on the downside as groups and nations try to protect themselves against the onslaught of protectionism and fear. [1:11:45] JIM: One has to worry if the Fed does this, let’s say the Fed rate hikes are the trigger for this event that you may be talking about in terms of a market crash, people are more conscious today of the Fed raising interest rates because there are so many people that are leveraged today. You have all of this week Oprah is doing a whole show on the debt levels of American consumers and the way that they’re living. You’re talking people who are racking up $100,000 worth of revolving credit card debt. You could almost see something could even change in government, or even the Fed. I don’t know if people would tolerate the amount of debt right now if indeed the Fed is what triggers this. ARCH: Well, if you look in the history books it says that the crash in 29 was caused by the Fed tightening when they shouldn’t have, and the Fed all says, “Oh, this was a mistake.” But if you look back in greater detail in the history of that period a great many banks were leaving the safety of the Fed, and going back to State charter, so I believe the Fed tightened up to punish those people, and then when the crash hit they saved the banks that were in their own coterie, and let the ones that had left the Fed go down the tubes. So they maximized their control over the economic scene of the whole United States by causing that crash. [1:13:18] JIM: Yes, I think a lot of Americans this is not what they read in their history books. ARCH: That’s right. JIM: But the Fed was entirely responsible for the Great Depression and the Crash in terms of what they did to the banking system leading up to the crash, and then also what they did afterwards. And here you have again – and I’m just thinking, Arch, a couple of years ago when Alan Greenspan makes a speech and he recommends that people take out variable rate mortgages, and when you have a Fed Chairman giving out financial advice like that we did see an increase in variable rate mortages. Now, here they are taking away the punch bowl, raising interest rates, the average American has seen his house payments go up $400 – if you take that as a country I’m not sure how much further they can go, and is it really smart at this point to push the car off the cliff? ARCH: Well, I agree with you that this may be being done on some level intentionally, and that another thing about that debt is as of January they increased the amount you have to pay on your credit cards. So these two factors together are going to put a lot of marginal families over the cliff, where they have to pay a greater percentage of what they owe on their credit cards and their variable rate mortgages kicking to the upside. And I think there are a great many more of them due in the next 18 months. [1:14:46] JIM: I just wonder how tolerable this time however you know we’re certainly a lot closer to news events today as opposed to 1929, and if they were to do something like this you just wonder how that would sell politically, if there wouldn’t be calls. I mean the last time I saw Bernanke on Capitol Hill in April, you had Sarbanes asking him a question, “is this going to be habit forming, are you going to be doing this every time you meet?” And of course, he backed off from that. Then you had another I think it was Senator Malone from New York who said, “the biggest concerns I get from my constituents is what you’re doing with interest rates.” ARCH: Well, now that we have the Patriot Act you may not be allowed to do very much against your government which would have been allowed previously. [1:15:32] JIM: So under the guise of national security, no criticism, this is the way things are. Boy, you know, Aaron Russo has got a film coming out – I think it comes out this month – America, from freedom to fascism that talks very much about what the government is doing. And he’s concerned enough that we may be losing the Republic that we have today. ARCH: Well, I’m sure you know the book about the return to serfdom, what is it? – The Road to Serfdom was an economics book basically. JIM: Sure. ARCH: Quite a few years ago, that was quite popular among the Austrian School of Finance. JIM: That’s where we’re heading. ARCH: I believe it is. I think the international banking groups did not like the idea of forming a new country and having that new country free of their grasp, but it appears that they have been working for a couple of centuries to bring us back into the fold of control of international banks. And I think they have been very successful and we are now the ripe fruit that’s laying on the edge of the tree, and is about to be plucked, and that our way of life and our system of government is on the verge of collapse. [1:16:56] JIM: Anything on a happy note that you would like to end on? ARCH: Well, I would say the astrological reason why this might happen to the United States in particular is that in the progressed birth chart of the United States the planet Mars –which is energy and aggression and your outward ability to defend yourself – is going retrograde and is turning around in apparent motion going backwards. And for the first time in the 250 years – and that within 5 to 10 years we will probably not be a superpower. But that is a good thing in that I believe we’ve grown apart –individual from individual and small group from small group – and that we may have to get back together and be friendly with your neighbors and your family in a survival mode but that it would bring a lot of us closer together, than [where] our society has been pushing us apart: television and moving over long distances and separating – and that could change for the better. [1:18:09] JIM: Arch, a final question. You do a lot of technical analysis, and then you combine that with your astrological work. Which gives you the greater accuracy, or is it simply a combination of both, because you’ve made some very good calls: the beginning of the bull market; the stock market crash in 87; and the last 5 years your calls have beaten the index. Is there any one that you give heavier weight to? ARCH: During normal times, anything out further than 8 weeks projection is heavily tinged with the astronomic cycles. As we get closer in and we get actual data coming from the market then you can use your technical analysis more. When there are major events in the sky where several planets are connected by harmonic connection, or eclipses, are involved with 2 or 3 other planets the energy is so powerful it will override anything. So when those major things, which is only less than one a year, I would stand up and take notice and watch out because it may be something like a tsunami, or an economic event like an… JIM: Earthquake. You know something major. ARCH: Yes, it could be a natural disaster or it could be sunspots. Now, going on briefly to things like global warming, it’s being caused by the planetary alignment pulling the center of mass of the solar system through the surface of the sun and thereby perturbing the sunspots. And the sunspots are the most active they’ve been in 8,000 years, and that is what is making the earth warm up. I have a record of the condition of the center of mass relative to the surface of the sun from 2,000 years ago, to 2,000 years in the future. And the period it is around the surface of the sun perturbing the sun spots, the longest period of time that that happens in the 4000 years is right now. And it has another 4 to 5 years to run, after which we will return to normal, so it’s not based on the amount of CO2 in the atmosphere, it has to do with the sunspot activity. [1:20:30] JIM: Alright, Arch, as we close, why don’t you tell people about your newsletter, and your website and how they can get information. ARCH: Alright, thank you. The letter – I started it in 1977 so this is our 30th year, it’s called Crawford Perspectives, and the website is www.crawfordperspectives.com. If you just google ‘Arch Crawford’ you should get around 7 to 800 entries in Google, so it’s easy to find. If you want to subscribe, you can do it online at the website, you can call us, you can fax us, you can send cash in an envelope. JIM: Or gold and silver. ARCH: Or we’ll come over and pick up the gold. JIM: Ok, Arch, I want to thank you for joining us on the program this week, I hope you’ll come back again and talk to us. ARCH: Delighted. [1:21:30] A long time ago, in an economy not so far away… The next chapter in the inflation wars saga – Return of the Fedi. The battle between good and evil economic forces rages on. Join the further adventures of Lukewarm Economy: “I can’t go on alone.” Obi Ben Bernanke: “you must learn the ways of the Fed.” Princess Hedona:, “Save me, Obi Ben Bernanke.” Fedi master Quota:, “use the Fed, Luke.” And the faithful robot 3CPI and RUDuped2: “we seem to be made to suffer.” And of course, the arch villain Darth Inflator: “I find your lack of faith disturbing.” 21st Century Fed presents the most extraordinary picture of all time: Inflation Wars. An adventure of epic proportions, a rebellion against recession, a battle we must win. Return of the Fedi, coming soon to a theater near you. May the Fed be with you. [1:23:06] JOHN: Well, you know, I’ve heard a couple of pieces of wisdom from people who have trained me for various things in the past. One was from my flying instructor: in any situation try to understand the best you can what was happening, and take whatever action is appropriate to deal with the situation – that was number one. Number two is: the first thing you have to decide when someone is attacking you is that you’re under attack, stupid, and some action is required. And that’s the same here, given everything we’ve just painted in the earlier part of the big picture. You gotta see what’s going on, we may be under attack, let’s get defensive. JIM: The most important thing to understand is where we are in the business cycle. Is the economy expanding or is it decelerating? And we’re coming towards the bottom part of the business cycle when the economy begins to slow down. Aand obviously in a business slowdown what you would be investing in or what kind of businesses would do well when the economy is expanding versus when the economy is slowing down [are different]. So I think you need to understand that’s where we are in the business cycle. I think it’s also important to understand that rates are rising globally, it’s not just the Federal Reserve that is raising interest rates, you had the Bank of Japan raise interest rates for the first time in six years; on Friday they raised it ¼ point. You’ve got the European central bank talking about raising interest rates. So it is going to become more expensive to borrow. And the implications for that is you have a large speculative community today, that is heavily leveraged whether it’s the yen carry trade, or wherever they’re borrowing money – although ¼ point interest rates in Japan even if they raise them to 1 ½, it’s still going to be advantageous to borrow at 1 ½ versus let’s say, 5 ½ in the United States. But, what you are seeing is high risk positions are now being unwound. That’s what we saw beginning in March: emerging markets got hit first; then it was junk bonds; and now it’s high beta stocks. And as the economy weakens and profits slow down as a result of a weakening economy, you’re going to want to be in areas that are immune to an economic slowdown. And that means you’re going to want to be in things that people have to have. You’re not going to stop putting gasoline in your car – you’ve got to put gasoline in that car to get you to work; you’re not going to stop turning on the lights, cooking in the oven, going to the food market and buying food; using water and consumer staples – you’re not going to say, “well, this month we’re going to go without toilet paper, because the economy is slowing down.” So you want to be in things that are defensive. And if you’re looking for a short place to park cash right now an excellent place is short term Treasuries because you can get for example 5 ¼% on a six month T-bill, or 5% on a two year Treasury note. And if the Fed does go on hold here, or maybe raises interest rates one more time for the last time, you know you’re going to want to lock in on some of these rates – because as the economy weakens and as the yield curve continues to invert, you’re going to get less on the longer end of the market and I think you’re going to see a rally here in bonds. So, you do want to start getting defensive. However, the one thing that was really striking is market sentiment. [1:26:50] JIM: You know it’s really interesting if you just take a little retrospective there, go back six to eight weeks or something like that – go back to May – everybody was bullish. And now it seems like everyone’s put on kevlar jackets and they’ve dived into their bear bunkers. JOHN: The only thing that makes me somewhat cautious about this is there are let’s face it, plenty of things to worry about: you’ve got the Fed hiking interest rates; you’ve got real estate prices going into a downturn; you’ve got the economy slowing down; you’ve got what looks like another Middle East war; you’ve got a conflict that is unresolved between the United States and Iran – all of this stuff. But we have gone from overly bullish in May, to almost deeply pessimistic, You know, I can’t pick up the papers or pick up a magazine or go to an internet article on a daily basis, and you have somebody new declaring this is a bear market and we’re going to have a crash – just as my last guest in Other Voices believes we are going to see a crash before we go to hyperinflation. And my dear friend Ike Iossif sent me something and I’m just going to read this to you – it really caught my eye. And it says: Dear Friends and Colleagues, once about every 12 to 18 months I have what is called a law school moment. That is, when I catch myself thinking what in the world possessed me to get into this illogical financial business. Why didn’t I go to law school instead? I have observed that 100% of the time within one to two days after I caught myself thinking like that the equity markets reach at least a short term bottom. For whatever it’s worth, I just had a law school moment. Best Regards, Ike Iossif. [1:28:42] JOHN: I don’t know, it’s pretty shaky in the law business as well, to be honest with you. JIM: Well, anyway, the point is when sentiment gets this bearish I think what you are seeing however, and this is wh |
What CNBC Didn't See: "Addicted to Oil" Commentary
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