|
The
BIG Picture Transcript
JOHN: Ok, Jim, a deep cleansing breath for everybody: silly season is over. JIM: Yup, but another big silly season starts – the Presidential election cycle is starting up already with several candidates coming out and announcing their candidacy well in advance. We’ve got Duncan Hunter, a Republican here in San Diego, who’s announcing he’s going to be running for the Presidency; and I think we’ve got one or two Democrats. The unusual thing about the 2008 Presidential election is you don’t have an incumbent, so both parties are going to run a plethora of candidates, and that’s going to make for an interesting race to say the least. [00:55] JOHN: It’s going to be interesting to see which way it goes. Maybe we should frame this whole conversation – there are 2 books out right now, both by prominent Democrats – Barack Obama has written The Audacity of Hope, and a rather contrasting book to that, Byron Dorgan Take This Job and Ship It. And given we have 700 odd days till the next presidential election – and for all of our listeners overseas we apologize, this is just the way it runs in this country, we’re sorry we put you through this every week – the real issue is which of these political philosophies is going to dominate this new Democratically controlled Congress when it is sworn in in January, because I think some of the Democrats are going to be very disappointed to be really honesty with you, just as the Republicans were with their people. Everyone is now going to have an eye towards these elections in 700 plus days. JIM: Well, one thing for sure is another element of uncertainty has been injected into the market place. We already have monetary uncertainty with the Fed on pause and talking tough on inflation. And then you also have economic uncertainty – you have a lot of people that think we’re headed for a recession; some people think we’re in a goldilocks economy and we’ll have a soft landing, and that really depends on what your views are on the housing bust, and how that’s going to play out. So, John, now what you can add to economic and monetary uncertainty, we now have political uncertainty with the new Democratic Congress. So I suspect you’re going to see greater market volatility. In fact, if you look at the VIX, we had almost a perfect head and shoulders pattern with all of the – what I call the – Federal Open Mouth Committee, which was operating in full gear in May and June, trying to control inflationary expectations. But since peaking in June this year, the VIX index has fallen roughly down to 10. I suspect that number is going to get more volatile as you look going forward. [3:01] JOHN: Well, as we try to look at the political crystal ball it’s going to be hard because we’re now in this hiatus period between now and the beginning of January when Congress comes in in January. And everybody is going to be speculating there are going to be some statements made. But reading these political winds, it would seem that protectionism is really growing within the Democratic circles, so let’s hammer on that one. JIM: Well, you know, that really depends on which element of the Democratic Party dominates the new Congress, because you’ve got the Democratic leadership such as Pelosi, Reid and Howard Dean who are really anti-market, anti-business and protectionist. However, many of the Democrats who were elected on election night are more centrist-oriented than the leadership of the party. You have Gabriel Giffords from Arizona; Tim Mahoney from Florida. So there are a lot of pro-business Democrats – 40 in all – that make up the economic moderates within the Party. This is a group that the President could work with if the moderates in the Party rise to prominence – and that’s the real issue. How are they going to reconcile the difference between those who got elected, who tend to be more centrist and more moderate in their leaning, and the leadership. And that’s just simply one thing we don’t know how that’s going to play out right now. [4:20] JOHN: Especially trying to read the pulse of the country as well. As I said, I think a lot of the more extreme Democrats may be just as disappointed as the Republicans were. Do we have any common themes running through the threads right now – again, we’re trying to look in to the crystal ball? JIM: Well, one thing that I think is common to both camps within the Democratic Party is: one, they want to raise the minimum wage; and two, control the price of drugs. So both elements would undercut the workings of the marketplace. What is interesting here, I think, is the Fed – at least if you take a look at the more recent pronouncements by Fed officials – is now worried about wage inflation. So, if you raise the minimum wage that increases the risk that the Fed will become more hawkish, and at least its Open Mouth Committee. There’s a real irony here that with both parties agreeing to a wage in the minimum wage that will automatically increase the risk of what we call cost-push inflation – meaning wage inflation starts rising. Meanwhile the real cause of inflation, which is an expanding money supply and credit, continues to expand unabated. So this lead into what I think we’re heading into which is a stagflationary environment. [5:32] JOHN: Currently, the Democrats have been promising what I guess they’re calling a Roosevelt-type 100 days, first quarter of next year. What do you think we could see in that? JIM: Well, let’s start with the obvious. As I mentioned earlier, minimum wage, and I think also rolling back of the Bush tax cuts – probably a move to raise capital gains taxes; probably keep the estate taxes in place – eliminating the estate taxes just went out the door. And probably, I would suspect some kind of move against drug, oil and tobacco companies. [6:04] JOHN: Just a question, do you think that the mood of the country is going to live with that? The middle class is getting hammered. JIM: It’s popular – remember every time we get quarterly earnings, and Exxon makes a billion dollars more than the previous quarter, all the rhetoric that goes out and we’re still stuck on stupid here. And so that could play. I think it’s less forceful now, as long as gas prices remain low. But if they start to rise again, as I suspect they will, because I believe oil prices are heading higher, that will play well. I also think controlling drug costs which will stifle innovation that would play out well. And of course, let’s attack everybody’s favorite sin company – why not go after the tobacco companies. Here in California, we tried to pass – I forget what it was – a $2.35 tax on cigarettes and thank goodness it was strongly defeated, but those kind of issues could resurface again. [7:00] JOHN: You’ve got to love those tobacco taxes because they don’t really result in much reduction in smoking but they do result in an increase in revenue to the State governments. But what’s interesting is that the real things that are floating under the surface. Like you talked about minimum wages which are on top of the surface, but the whole bit about expanding credit is running under the surface – nobody seems to be picking up on that. There’s also another issue no one is picking up on, which is really that the global economy and our interactions there are plugging ahead: US and Washington in particular are no longer the center of the economic universe. We’ve lost most of our manufacturing base; we’re no longer energy and capital self-sufficient. JIM: You’re absolutely right, John. We import today 70% of our energy needs, so attacking oil companies, or removing tax incentives for oil companies to build refineries is only going to exacerbate our energy problems. You know, the rest of the world is preparing for peak oil and we’re still stuck on stupid. Also, I believe that with the US heavily dependent on foreign goods – you know, John, we don’t make the stuff anymore – and even more importantly we need foreign capital to help pay for it. I mean just go into a store, go into a clothing store, or a department store – tell me where the clothes are made? They’re not made here anymore. Walk into a Best Buys or Circuit City, that’s not made here. Most of the electronic goods in the store from the TV set to the DVD players, the camcorders, the digital phones – that’s not made here anymore. Walk into a furniture store, a lot of furniture building has now been shipped overseas. So we have very few alternatives and especially since we have a negative savings rate in this country. I believe the Democrats, just like the Republicans are going to find their choices are rather limited in a globalized economy. What is really needed here, at least in my opinion, is we need to rethink our flawed economic philosophy; we need to reorient the economy from a tax, spend and borrow economy to one that saves and invests in the future. And what I mean by saving – I mean people saving instead of going into debt; corporations investing in new plant and equipment. And here’s a good question if you think about it: why is it Mercedes-Benz, BMW, or Toyota or Honda can come here to the United States build a new modern factory, produce cars and make a profit? Why can Japanese companies, for example, come up with plasma screens and new technology and compete globally? That is an issue here that I think we need to address: why aren’t we saving, why aren’t we investing any more in this country the way they are doing it in other countries? [9:50] JOHN: You’re talking really here about core issues, and if you look at the debates between what I call socialist party D and socialist party R, they’re not addressing any of those core issues any where. They’re addressing all of the little superficial back and forth. So what would you do to be invested right now, given where you think we’re going with all of this? JIM: Well, number one, I believe a Democratic Congress is going to be good for gold and oil. Protectionism is bad for the dollar, and a falling dollar is good for gold. In the area of energy I think you’re going to want to shift to foreign oil companies in case a Democratic Congress tries to pass a windfall profits tax. We saw what happened last time they did this in the 70s: oil imports went up, the price of energy went up, and our energy independence gave way to energy dependence. So what you need to prepare for, as I mentioned earlier, is stagflation: a weak economy, rising inflation rates and a falling dollar. You also want to own I believe multinational companies, who are going to have the ability to shift money and capital to low tax jurisdictions; and also who have the majority of their sales internationally. That’s because if the dollar goes down and you’re an international company and you’re getting paid in yen or euros or Canadian dollars or Australian dollars that translates into higher profits, and helps protect against a falling dollar. I think also these multinational companies will benefit the most from a falling dollar and our rising US tax rates. So stagflation first, hyperinflation second is where we are heading in the future. I think you need to plan now before the dollar heads into its decline. [11:32] JOHN: One of the most interesting things is that with any scam, or things related to a scam, of which inflating money supply is one, last year the Fed announced that it was getting rid of M3 money supply which really set off some alarm bells because this was sort of the key indicator of exactly what the money supply was doing as far as expansion. It was obviously done in an effort to hide where we were going now, because we knew the Fed was going to use a lot of inflation to try handle Social Security, and in keeping the economy afloat. In reality, they really don’t want the markets knowing just what it is that they are doing. JIM: Well, before they eliminated reporting on M3, it was growing around 8%. Many people have reconstructed M3 and that figure today is probably running at close to 10%. And remember, what we’ve seen this year, and we’ve talked about it here on the program, is credit expansion is up over 30%. We’re now tracking at an annualized rate of almost 4.4 trillion of newly created debt this year – that’s on top of 3.3 trillion last year. So if anything, the credit bubble is alive and well in this country. [13:03] JOHN: I always liked the comments: “we’ve reduced the deficit,” or “we had a surplus this year.” Really? Then why did the US debt continue to go up? That’s the bottom line. So, is the Fed still stoking this inflation engine? – 30% is a rather breathtaking figure. JIM: Well, it’s not just the Fed today, you also have the US Treasury has been working quietly behind the scenes through what we call repo agreements. And repos have long been used by the Fed to get money quickly into the hands of financial institutions. As financial institutions become more liquefied they put that money into circulation in the form of loans. And I mean, just look at the repo activity in the last couple of weeks where the Fed and the Treasury put almost 8 billion and 5.5 billion into new repos into the system. This is what is keeping rates down; it’s also what’s keeping credit abundant. Yes, housing prices have softened but you can walk into any housing development and you have no problem getting credit. In other words, you don’t get the impression as for example when the Fed tightened in 1991, and we had a housing bust, the S&L crisis. Back in that period of time lenders got stricter, they wanted to see more money down, things became tighter, they became less reluctant to grant credit, it was harder to get. You just don’t see that today, there’s plenty of loan programs. Turn on the television and look at what you’re seeing: finance companies offering new forms of credit or easy ways to get credit – pay off loans, take out equity. So if anything, this whole game is still going, and the Fed and the Treasury are both working to keep the system liquefied. [14:50] JOHN: So even though we hear like the Fed is tightening interest rates over on the left hand which the market tends to watch, it’s also injecting billions into the financial system every single week. This would seem to offset it, like two things are going on at the same time. JIM: Sure, it’s been my contention, we’ve always talked about it here on the program that the financial system has plenty of money, which is why we now have rampant inflation which is visible in not only asset bubbles – the most recent one being real estate but also the price of things. I mean just look at our commodity index, and the spot commodity index, which has been hitting a series of new highs. [15:26] JOHN: Well, with inflation visible to everybody here, why do you believe many analysts are still focusing on this deflation when inflation is right in front of their face? JIM: I think a lot of that goes back to our educational system. There’s a real lack of monetary understanding in this country – both on Wall Street and in Washington. Let me give you an example of what is inflation. Inflation is simply too much money chasing too few goods. Now, let’s take the hypothetical land of Oz, and let’s say you and I live in the land of Oz and the central bank in the land of Oz is increasing the supply of money. So that means you and I have easy access to money, easy access to credit. So now that we have a lot more money that we can spend than we normally could if we were just using our own income or savings – in other words, we are going into debt to increase our spending – the goods and services that we would pay for if they were only made here in the United States or let’s say the land of Oz, if we could only buy US goods, well US manufacturers could not make enough goods to supply this increase in demand that’s coming from extra money being printed. So what would happen is the price of those goods would rise, and that would be a visible sign of inflation. However, let’s say in the land of Oz, in addition to manufacturers, we now have imports coming into the country. Well, what happens is now this excess demand that is being created through easy money and credit can be channeled into foreign goods. And so therefore, in essence what we’re doing is exporting our inflation into imports. And so, when you look at the trade deficit today, it has been expanding since 1995 when it really began to take off; and it is also the same period of time when the money supply began to grow in this country rapidly. The first thing we did is we saw that inflation manifested in rising stock prices and a rising trade deficit. So the trade deficit is the flip-side of an expanding money supply – that is, excess money that is being channeled into goods that are made overseas. In other words, the relief valve for all that excess demand is our trade deficit. And that’s what most people don’t understand. They don’t understand that for example, if the price of real estate goes up at double digit rates because the money supply and credit expands, we call that a bull market; or if stocks go up in the 90s, as the money supply just went bonkers, we call that a bull market. So any time we have asset inflation we call it wealth creation, even though it’s artificial wealth; but it’s another form of inflation that isn’t recognized by the marketplace. [18:33] JOHN: So all of this talk about higher interest rates – as an indicator of tightening liquidity – doesn’t really mean anything if both the Fed and the Treasury are pumping money into the financial system by the backdoor entry. JIM: Exactly. They talk tough because that’s just a ruse that they use to keep the bond markets fooled. What they’re actually trying to do is control inflationary expectations and prevent them from taking hold, because when inflationary expectations rise, what happens is money velocity also rises. And when that happens inflation kicks into high gear and accelerates. [19:10] JOHN: So basically, what you have here is a confidence game, which if they don’t control it, it goes into a runaway breakdown. JIM: Precisely. The Fed needs to keep the financial markets fooled as it inflates. The last thing it wants is rising inflationary expectations to take hold. So that’s why they talk tough. Any time you see the CPI or hear the core rate or energy prices go up, they always try to focus the market on such nonsensical concepts, as “well, the headline inflation might have gone up, but the core rate is really tame, it’s making us a little uncomfortable – but 2.4%.” What everybody knows is the core rate doesn’t relate to anything, and headline and real inflation is running much higher than that. The other thing that they’ll try to do is focus the markets away from what’s really causing inflation, which is rampant money and credit creation, to such concepts as rising oil prices. So, it’s OPEC and greedy oil companies that are causing inflation, or it might be wages; or commodity prices – when rising commodity prices are really a reflection of too much money chasing too few goods. [20:22] JOHN: You’re listening to the Financial Sense Newshour at www.financialsense.com. Don’t forget, this program is posted every Saturday morning by 7am Greenwich Mean Time, for those of you who listen around the world; that works out to about 2am Eastern Standard Time. And just for the record, Jim before we move on to Other Voices here on the program, of which we have 2 different guests today on Other Voices: you live in the land of Oz, I live in God’s country. [20:45] JOHN: Well, you can certainly call California the land of Oz – I grant you that. [20:54]
JIM: Well, Evelyn Garriss, last time we had you on the air, your forecast for a benign hurricane season played out according to your script. Here we are, now, middle of November, 6 weeks away from Winter – let’s talk about Winter, what’s it looking like? EVELYN GARRISS: Well, I’m telling my clients it looks like it’s going to be a double dip Winter. We have an El Niño, and what I’m expecting is for most of the country we’ll be seeing some warm weather – it’ll continue in the West so I hope you like the weather you have now. JIM: Oh it’s lovely. EVELYN: Yes, it doesn’t feel very wintry, or even Fall, does it? JIM: No, I’m actually looking forward to going sailing tomorrow, it’s going to be nice. EVELYN: It’s funny. This type of weather brings enough moisture when you have this size El Niño in California, that typically some of the mountains inland get some good snow, but the coast is so warm nobody even thinks of skiing. Some of my sports store clients just hate this type of weather, because they say there’s all that beautiful snow going to waste while everybody goes to the beach to get a suntan. [22:13] JIM: That’s the way it is in California, but what about the Midwest and the East, what’s that looking like? EVELYN: That’s looking cold. They went from Summer to Winter and forgot to experience a little bit of Autumn. One of the things about a weak El Niño is there’s so much warmth in the West, that when the cold polar air dips – and some of that air is very cold this year – it cannot drop into the West very well, and so instead you have the cold weather dropping unusually far into the East. And so we’ve had some very cold weather. Now, if this El Niño continues, as it seems to be shaping up into a moderate El Niño, that what will happen is that the warmth is going to continue to spread West, especially in the northern tier of States and the southern part of Canada. And by Christmas or early January, it’ll reach pretty much all the way across the country. So the mid-Winter will be pretty warm and this is going to be really good for reducing gas consumption for heating. Then, as the El Niño finally starts to retreat, the warmth stays in the West but it retreats back away from the East and the cold air drops like a stone. And so in the East it’s cold, warm in the middle of the Winter – when it’s supposed to be coldest – and then when it’s supposed to warm up it’s cold again. And that’s the time when typically gas prices start shooting up on the stock market. [23:40] JIM: Well, Evelyn, if I’m Houdini hedge fund manager, should I stay away from natural gas or should I buy it? EVELYN: Well, I never give financial advice – I’m just saying at this point it looks like if there is gas consumption it’s going to be concentrated more in the early part – you know, late Fall, very early Winter – and then late Winter. And it’s going to depend on how much gas is stored whether or not they have enough to tide them through the late Winter cold, or whether or not there’s going to be big demand on the spot market. [24:22] JIM: Let’s talk about energy demand in another part of the world and that’s your recent newsletter, you’re talking about the hurricane season in Asia. What’s that looking like? EVELYN: It has been extremely heavy. Well, it may have been quiet in the Atlantic but it sure has not been quiet in the Pacific. What’s been happening is because of the El Niño, we’ve had a lot of warm water going up the coast and this warm water is providing all sorts of energy for storms – medium size storms – to grow into tropical storms and hurricanes. In fact today – here it is, November, and we just had tropical storm Rosa in the Pacific and it sort of threatened Mexico slightly and then retreated. One of the things happening is because when you have an El Niño a lot of the upper level winds blow from West to East. Some of the remnants of these hurricanes in the East Pacific have been blowing in to the US and causing flooding in Texas. Remember Texas, when they were complaining about the drought? Well, they’ve been getting flooding from the unusually warm waters in the Caribbean and from remnants of hurricanes in the Pacific, and they’re getting a double-barreled shot of rain and they’re flooding. Be careful what you wish for. That’s not the only area that has been having extensive flooding. It’s been so warm in the Pacific that a couple of weeks ago we actually saw what’s called a subtropical storm off the coast of Oregon. Now subtropical is when you have a normal cold front and it hits water so warm that the bottom part of it becomes rather like a tropical storm. And if it was in the Atlantic we would have given it a name and counted it as one of the hurricanes, but it was in the Pacific so everybody just looked at the radar and went: “My! Isn’t that interesting. Who would have thought you’d see something that looks like a developing tropical storm off the coast of Oregon?” Fortunately, it cooled down before it hit, but it sure has been raining on Oregon. [26:27] JIM: Here in California we’ve adopted a lot of global warming measures, and I don’t know if you’ve had a chance to see the London Telegraph is running a series on global warming and they’re just blowing the socks off a lot of this stuff as just being nonsense. EVELYN: What’s happening is people have only been hearing one side of the argument and it is like any new and developing science. There’s a lot of evidence on both sides, and typically what happens is scientists argue and come to some compromise in the middle. And when you claim there’s global warming with no compromise you’re only giving one side of the argument – you’re cherry picking your facts and you aren’t giving people the whole picture. For the last 3 years, over all, I don’t think it would count this year with the El Niño, but for the last 3 years before we actually had that the global oceans overall have cooled slightly – not much, but they’ve cooled. You hear stories about the huge ozone hole in the Antarctic, and the reason the ozone hole is so large this year is the Antarctic is unusually cold – up to 9 degrees colder than normal. So what your listeners have to realize is it’s very, very complex; and if somebody starts telling you that climate is simple and it’s all going to get warmer across the globe and we can stop it with a few clever laws, well, they’re just being sold a story. [27:55] JIM: You’re starting to hear too, at least in the scientific community I’ve heard some things about a mini-ice age coming – any truth to that in terms of the way you see it? EVELYN: No, I think it’s one of the concerns that some scientists have had is that a lot of the warmth in the Atlantic, indeed one of the reasons why the Atlantic has been so stormy is there’s a number of currents – of which we’ve heard of the Gulf Stream – taking tropical water North. And right now, the Gulf Stream has been flowing very fast, and bringing a lot of warm water up to the polar regions and the glaciers have melted. Well, when that happens if it melts too much then it dilutes the saltiness of the water that’s flowed up North – which normally sinks fairly fast – and it slows down cold current. Now, historically, what we tend to see is the Gulf flows very fast, it dilutes the glaciers enough, the process slows down, and it typically goes fast for 20 to 30 years and then slows down for 20 to 30 years. And since 1995 it’s been going fairly fast. We are now starting to see the glaciers melt enough that eventually they will be slowing the flow of the Gulf Stream. You have some alarmists saying, “well, thanks to global warming it’ll melt so much of the ice that the Gulf Stream will stop flowing all together.” That has happened a few times in the past, but right now it’s being used as a terror tactic. At this point, it’s a very low probability. [29:29] JIM: What about the concept of global dimming. I recently ran into an article in the New Scientist about the next solar cycle, perhaps saving us from global warming. Do you want to comment? EVELYN: One of the things that people have been noting is that the Earth tends to be a self regulating system. When the waters get too warm they get a lot of cloud cover over them. Sunlight can’t penetrate through the clouds, and it cools down – and again, it’s a cycle. And we are at this point now, we’ve been watching our oceans warm up over the past couple of decades, and now we’re seeing an increase in cloud cover. In fact, if you look at the moon, one of the ways that you can tell how bright the earth is reflecting the sun is you can measure the amount reflection that shows on the moon. What we have seen is global dimming – the earth used to shine brighter. Now there’s more cloud cover and we can measure it. The earth is not shining as bright, it’s not absorbing as much heat, it’s reflecting more. Again, everybody who talks about global warming in the most scary form acts like there’s a trend, and it’s a straight line trend, and nothing will deviate, and man is the only thing that changes the situation. Well, 70% of the world is ocean and they’re really more in charge than we are. [31:04] JIM: Evelyn, as we close, if people would like to find out more about your newsletter why don’t you tell our listeners how they could do so? EVELYN: Well, it’s the Browning Newsletter, and this is our 30th year. Anybody who’s interested can contact Linda at Fraser.com, and we’ll be glad to send a sample, and it will include a discussion of the Winter and showing maps where they can expect some warm, and where they can expect weather. [31:37] JIM: Alright, Evelyn, as always it’s a pleasure to have you on the program. All the best to you, and I hope you’ll come back and talk to us and tell us what Spring and Summer are going to look like. EVELYN: As soon as I know I’ll be glad to.
JOHN: Well, you have stated a number of times on the program – what am I saying? I know it so much I know it in my sleep – you’ve said many times on the program that we’re in a long term commodity bull market, and you’re seeing a lot of conflicting opinion regarding this view out there. Is there any time when there isn’t a conflicting opinion out in the market? My gosh, you get a bunch of theologians together to discuss how many angels on the head of a pin, and they go on for hours. Maybe we need to discuss what the drivers are behind all of the different opinions. JIM: First of all, what is really critical I think here to understand is all major bull markets are driven by supply and demand factors. Looking at the commodity markets, you had a multi-decade bear market in commodities between let’s say, 1980, all the way up to 2000. And as result of falling commodity prices whether it was oil, natural gas, copper, gold, silver – it didn’t matter what it was – the result was weaker commodity prices forced the industry to consolidate. The weak players who couldn’t survive were either swallowed up by the bigger guys and stronger companies, or they simply went out of business. Look at the energy sector and the mining sector as examples of this trend. What did you see in the late 80s, 90s – not only in the energy sector but also the mining sector? Throughout the 90s you saw the oil industry consolidate: Exxon bought Mobil; BP bought Amoco and Atlantic Richfield. There was a whole consolidation phase. And the same thing happened in the mining industry as all the mining companies got swallowed. So today, you have both in the energy sector and the mining sector these big behemoths whether it’s Exxon-Mobil, or it’s Barrick. So this is an example of what I was talking about as the industry contracted and consolidated. In addition to this contraction and consolidation, you also had no real new investment money come into the sector. I mean who wanted to invest and explore for oil in the late 80s and 90s when the prices would sometimes get down to $10 a barrel? Who wanted to go out and find new gold deposits or copper deposits when you had the price of gold down in the 200s, and the price of copper around 50 to 60 cents? And also, most of the CEOs of these large companies – whether it was an oil company or a mining company – in the energy sector they shut down or shuttered refineries; and the same thing happened in the mining sector. They laid off personnel; they made large efforts to contain costs and conserve cash, because that was the only means of survival. And that is how they survived. And a lot of these people are still running these companies. Meanwhile, demand continued to grow as the world’s population grew, and for the last decade we didn’t notice this trend because we had plenty of spare capacity. As I mentioned, in 1985 the world had a spare capacity of 10 million barrels a day; we had surpluses of gold and silver – the US had large stockpiles of silver which no longer exist. So now, that spare capacity has shrunk, and what we’re seeing is this supply-demand imbalance play out in the market place through higher prices. [35:33] JOHN: Let’s do some painting of pictures for people here. Let’s take some specific examples so that this makes some sense. JIM: Well, take the oil industry – I mean it’s obvious to everybody that the price of oil has gone from 20 to over $60 – and one time almost $80, and people would think with higher oil prices that oil companies would be investing more money. But the International Energy Agency issued a report which showed that the oil and gas industry invested a little over $340 billion between the year 2000 and 2005 – so that was an increase in investment of 70%. Now on the surface you would think that’s a lot of money that’s being invested. However, industry cost inflation – remember last year it was running around 35% – accounted for the bulk of that money. So if you adjust these dollars for inflation, the oil industry’s investment increased in real terms only about 5%. And if you think about how big that industry is that is really nothing, and it is one reason why I believe energy prices are headed higher. Scrimping on investment as we have in the first half of this decade is going to become evident in higher prices in the second half of this decade. [36:39] JOHN: You’ve also got the situation where world demand, especially due to the developing countries, is growing at an unabated level. I mean we’re doing our own demand on it in the West, but also in some of the other countries. JIM: Sure, because what we have now is a pressure valve that is bearing strongly on the energy sector. World oil demand is rising faster than supply; and the oil industry’s investment at both the international oil company level – which is a smaller piece of the pie today – and at the national oil company level, they’re not really adding to world spare oil production capacity. We no longer have that buffer of spare capacity to offset these supply disruptions. So when you have a Katrina, a Rita, or conflict break out in the Middle East; or you have a terrorist attack on terrorist installations in Nigeria; or you have somebody like a Hugo Chavez, who said he’s going to cut off the supply of oil – and by the way, Venezuela has been reducing its shipment of oil to the US, as is Mexico as production goes into decline – what you have are these spikes in prices, because the spare cushion is gone. And that’s one of the reasons why you see these big spikes today in energy prices. And the other thing is this isn’t being explained to the public because if oil was to go from $60 now to $80 a barrel, you know you’re going to have all kinds of conspiracy theories, or you’re going to blame the oil companies that they were doing this ,when in reality the oil companies produce the smallest fraction of where we get our oil today. Most of the oil that you have in your tank, if it’s not produced here, probably came from Saudi Arabia; it may have come from Nigeria; it may have come from the Caspian; it may have come from Venezuela and elsewhere. It’s not coming from Exxon-Mobil. [38:39] JOHN: And you’ve also got global competition for resources as well. JIM: Here’s the issue that I think really needs to be addressed in Washington and they’re not even cognizant of this fact. What you have now is a global competition for resources. For example, Chinese leaders just wrapped up a summit with 48 African nations. They’re setting up important relationships that are going to eclipse Africa’s historic alliance on the West for capital. And you know, throughout this, China is very unapologetic about what it is doing in Africa and about its need for African resources – I don’t care if it’s oil to precious metals, to raw materials or food. And what it’s doing is it’s looking for a steady, secure, long term source of supply in energy, raw materials, because China is building its country; it’s building its infrastructure and that means it has a voracious appetite for raw materials. So what they’re doing is they’re building relationships with these countries. They’re building and investing in Africa, building its infrastructure. In exchange, they’re locking in long term supply contracts for natural resources. If you take a look at trade between China and Africa, it has been increasing at over 30% a year, and at the heart of that trade is resources and raw materials. All of this trade is dominated by this fact alone. [40:07] JOHN: Yes, and it’s not just the Chinese. It’s almost like we have this blindness here in this country to what’s going on. The Japanese and the Europeans are trying to do exactly the same thing – there’s a global race out there to acquire resources, and that just puts the US further and further behind. But I’ll bring it back to the question I always have: how does this impact investing, then? JIM: I think if you’re an investor you’ve got to think globally today when it comes to your investment portfolio. In energy – you have to think internationally because US oil companies no longer dominate the energy scene. And if for example next year, they slap a windfall profits tax in an effort to punish US oil companies and tax them, you’re going to want to think about international oil companies which are not going to be subject to that tax. I also think as the world builds its infrastructure – both in India and China and throughout Asia, even Latin America – you also need to think about infrastructure plays. That’s not only internationally but here in the United States, because we’ve neglected infrastructure in this country from bridges, airports to our water systems. And on top of that, if you look around the globe today, the emerging world is industrializing. And what that translates into is a greater demand for energy use, and a greater demand for raw materials. As they industrialize and their middle class rises they’re going to need better water systems, diets improve. So energy, metals, food and water and I would add capital equipment companies dominate how we think, and at least what we’re putting in our portfolios, and what we’re looking for. [41:51] JOHN: Let’s face it, there’s not a lot of people that think the way you do, so I would suspect everything we’re talking about right here has not really fully caught on with investors, which is why you keep pointing out that energy and precious metals remain cheap. The demand for it has not gone up because there is no cognizance of the things that we’re talking about. So I take it, if I were to look in your crystal ball, you’re still buying? JIM: Absolutely, I mean we love energy. Where else are you going to find companies that provide a product that everything they can produce they can sell at world market prices; a product where you have demand that is inelastic and people demand it. And also, when you look around globally and you see central banks, whether it’s the US Fed, the Bank of England, or the Japanese central bank, or the Chinese central bank, they’re printing money which means all currencies are going to be debased. And you’ve got growing world population. Our water supplies, ground level water is declining. Our supply of food stocks is the lowest that they ever been in three decades. This is something that’s not going to go away And you really see this any time there’s a crisis – you know, an earthquake, or some kind of weather related event, whether it’s a hurricane, tsunami, whatever it is – watch what happens to your food and water supplies. They disappear off the shelf. That’s how dangerously close we are in our modern, industrialized world. It’s very hard to think about – you know, we’re always thinking about technology: cell phones, the internet, wireless communications, satellites in space, all of this stuff – but what we’ve really done over the last 3 decades is we’ve neglected infrastructure, and the very basic foundation blocks that make our economy run. [43:41] JOHN: Also the tax monies that were originally targeted for that have been siphoned and funneled into other pet projects as well. So you might get used to cell phone soufflé if you have to eat – can’t eat your cell phone We have been talking here on the program about alternative energy. Our next guest is going to focus on one possible solution.
JIM: Harvesting green power, farmers are sowing the seeds of an alternative energy future, but how much of the country can we fuel on corn? Joining me today is Adrienne Carter, she’s a writer for BusinessWeek. And Adrienne, tell us about what’s going on in the Midwest. It’s sounds like an energy revolution is taking place. ADRIENNE CARTER: It is. It’s very interesting. You usually don’t think of the Midwest and agrarian communities as being kind of a hot-bed of innovation, but farmers are really becoming the center of green energy. And part of that is they just have the land, the resources – whether it’s ethanol, wind or solar – to really make alternative energy work. [44:56] JIM: One of the things that you write about in your article, you say that to make even a small dent in imports from the Middle East an increasing proportion of food crops are going have to be converted to fuel. That could push up the cost of food on the dinner table. And critics of this ethanol economy say that if you factor in all the natural resources needed to cultivate corn and transform it into ethanol, the environmental gains are less than meets the eye. Your take on that? ADRIENNE: That is a big concern; one is the fuel versus foods debate. Right now, we’re using about 14% of our food crop to go toward ethanol, and that could increase to 35% within the next few years. The fact is you do need natural gas to cultivate the land, and there’s gas used to make the ethanol. So environmentalists are worrying that it’s not actually paying off for the environment. But that assumes really that the technology stays current, that we stay exactly where we are in terms of ethanol processing and biodiesel processing, and we don’t advance technology. If we move to what’s known as cellulosic ethanol that whole dynamic shifts, because cellulosic ethanol uses things like corn stalks, it uses switchgrass and non-food crop to make ethanol. So that dynamic really will change as the ethanol industry and the alternative energy industry evolves. [46:19] JIM: It was fascinating, in there you have some charts that shows, for example, when it comes to ethanol 40% is coming from our farmers; when it comes to biodiesel, farmers are providing 35% of it; and here’s one I found rather amazing, when it comes to wind, farmers are providing 70% of wind energy. Why don’t you address not only the ethanol issue, but also biodiesel and wind. ADRIENNE: Farmers are some of the first people to get involved in ethanol, and we saw a real crop of them pop up about 10 years ago. And the reason why they’re so involved in it – and they’re owning the plants, they’re providing the corn – is because they were there when it started. Their corn is ultimately what’s going in to make the ethanol, so they knew about the industry, they were on top of the industry. And they saw this as a way not only to raise their corn prices, but also as a way to add to their income by owning plants by being investors in plant – by really being there on the ground floor. Wind is just a natural for them. They have these huge land resources; they have acres and acres and acres. And to have wind turbines which are these huge majestic windmills, you really need a lot of land. You’re not going to see them in cities, you’re not going to see them in major urban areas, you’re going to see them in rural populations. And so rural landowners, ranchers and farmers are going to be the guys that have to do this, so that’s why you’re seeing so much of their involvement. That dynamic has somewhat shifted now in that Wall Street corporate types have seen the returns you can get, and so that’s starting to shift now where you’re starting to see more corporate types. ADM is obviously a big player in this; you’re seeing a lot of private equity and hedge funds get into this area. This dynamic is shifting a little bit as they’ve seen the returns grow. [47:56] JIM: You also had a little section in your report, it was called Green Bounty, and you gave an illustration of today’s crop farmer, where he sells corn and soybeans and receives farm subsidies from the government; and basically in the example you gave, he receives $627,000 in revenues against costs of $600,000, and makes $27,000 in income. Then you have one called ‘tomorrow’s energy farmer’, where instead of 600,000 in revenues, the revenues go up to 800,000, costs are roughly about 600,000; and farm income goes from 27,000 to over 210,000. This increase in wealth is really invigorating the local communities. ADRIENNE: It really is. I spent a lot of time for this story in an area called Rock Country, Minnesota, which are kind of some of the early adopters for a lot of these alternative energy investments. The biggest jump for them is higher corn and soybean prices. So the more demand you’re getting from ethanol prices go up. And we’re already seeing prices north of $3. People think it will stay there. And that’s really the biggest benefit. But then you’re also seeing you’re getting dividend payments you’re getting from the [inaudible], you can get returns from a wind turbine. You know there are newer areas coming up too, like CO2 sequestering – plant trees on your land, you can make money off of that. And so really the opportunities going forward could really be revolutionary for agriculture. I mean not everybody is going to benefit from all of this, but the overall dynamic of higher corn prices and higher soybean prices will be a long term benefit for these guys. [49:34] JIM: What about biofuels? You’re talking about it in your article: for example, the energy output with biodiesel seems to be very high; you’ve got the cellulosic ethanol made from wood crops – and plant waste has an energy balance up to 36, so you have high energy output for the amount spent on energy input. ADRIENNE: Exactly. Really the future of biofuels is where a lot of the excitement is, that you’ll be able to get – whether you’re growing poplar trees, or you’re growing pinolas – corn is probably the least efficient of all the ingredients into biofuels. You know, the next generation is where a lot of the excitement is going to be, because you can get more crops per acre to produce a heck of a lot more gas and fuels. So it really is where a lot of the excitement is. [50:25] JIM: Do you think that the future of this is just going to go forward even more so. Would you ever see the day – I know, for example, if you look at what’s happened in Brazil, where because of new oil discoveries and also because of ethanol, they have become energy independent. Our consumption is so large, but do you see this as someday providing 10, 15, 20% of our energy needs? ADRIENNE: There is a lot of hope behind that. I mean the thought is that wind, which is now less than 1% of our electricity needs could move to as much as 20%; ethanol and biodiesel could move to as much as 20 to 30%. And I think those estimates are reasonable – assuming that we evolve to the next generation, in ethanol particularly. That’s because the fuel versus fuel debate is interesting, we can’t reach those 20 to 30% levels for our gas needs unless we move to the next generation because we’re going to run into food problems, we’re going to run into crop issues, and higher livestock costs unless we shift to the next generation. So it is a reasonable amount. Will we ever be energy independent? Probably not – that’s a little far-fetched I think for the United States. But I definitely think there is the option for that 20 to 30% - whether you’re talking about wind or biofuels. [51:40] JIM: Let’s talk about politics for a moment. We’ve just seen a change in Congress. Do you think the Democratic take over of Congress could also emphasize ‘greener’ type fuels: wind, alternative energy – more so than the previous Congress? ADRIENNE: You know it’s interesting, biofuels have been a really bipartisan issue in a lot of ways. We saw President Bush in his latest State of the Union really get behind renewable fuel standards, and push the United States to wean its dependence from oil. You know, a lot of it is dependent on oil prices. If oil prices drop down to $25 a barrel the clamor of both parties changes a lot. But you know I think people aren’t anticipating us moving to $25 a barrel any time – if we stay at 50, if we stay at 60, this is an issue both sides are willing to get behind for our oil independence, or at least wean the addiction somewhat. So really, I think regardless of what party is in power, you’re going to see a lot of excitement and a lot of energy behind this, in part just because it’s not a green, it’s not an environmental issue any more. It is that, but it’s an economic issue, it’s a national security issue. So when you have all 3 of those forces going on it really becomes a Republican and a Democratic point. [52:57] JIM: Well, I’ll tell you it was a fascinating article, because it really brings to the forefront when you think of energy, you think of oil companies drilling holes, drilling for oil and natural gas, you don’t think of our farmers providing a lot of this. A fascinating article. The name of the article once again is called Harvesting Green Power, it’s in the current issue of BusinessWeek, the November 13th issue, the author is Adrienne Carter. And Adrienne, I’d like to thank you for joining us on the program. ADRIENNE: Thank you. [53:35] Uranium: an Energy Investment Needing a Catalyst JOHN: Well, we have to come back to harp on a subject we’ve come to before here on the program, alternatives are just sort of starting to become the buzz out there, driven more I think in a lot of the public market place by global warming concerns. And by the way, they’re ready for another round of controversy that’s erupting in both the US and Great Britain – but we won’t go into that one here. A lot of the alternatives they’re talking about just cannot be brought online fast enough, but one of the promising quick fixes is nuclear energy. And it would seem like investments in uranium – because obviously it’s uranium which drives this whole thing – is really an undervalued asset that’s really just looking for some kind of catalyst to make it take off and go. JIM: I think peak oil is going to be a big catalyst for nuclear power. I think there are 440 nuclear power plants in the globe and there are probably 250 now that are either in construction, the planning stage or in the blue print stage. So not only is nuclear power going to be one of the solutions for energy in the future, especially for providing electricity, we know it works [now], we know it works in France that’s where 75 to 80% gets its electricity from. We know that for example China is moving aggressively here – by the year 2020 they’re going to build 30 new nuclear power plants; India is moving in that direction; Japan is moving in that direction and even parts of Latin America. So we know on the drawing boards these 250 new plants are going to be coming on line here in the next 12 to 15 years – you know that’s going to be one solution to our energy needs. I mean are people really going to want to say, “let’s build a natural gas fired plant,” when natural gas production could be peaking. It certainly peaked in the United States, and it’s peaked in Canada. And a lot of where natural gas is located is stranded, which means you have to liquefy, put it on a special ship, ship it across an ocean, get it to a terminal where it gets put back in its gas form, and then sent through some pipeline. So nuclear power is a more sensible approach, and you’re certainly seeing that rise both in Europe and around the globe. [56:04] JOHN: Well, obviously, nuclear power plants run on uranium, like I said at the beginning of this segment. So, that would mean that uranium has to be a good investment. Sooner or later, people are going to wake up to the fact that this is going to be it. JIM: Absolutely. If you look at a graph of uranium prices we’ve gone from almost $10 to $60 – it’s almost been nonstop. And even more important is I think you’re going to see uranium prices in the $70 to $80 level here in the next 12 to 18 months. The problem that we have with uranium is mine production only supplies about 60% of the uranium used today. A lot of the uranium that we’re getting or consuming is coming from stock piles that were built up in the 70s and 80s, and the decommissioning of nuclear weapons, especially in Russia. [56:51] JOHN: It looks like there’s been a paradigm shift in thinking around the planet: people are moving to nuclear, and notably by the way by supposedly environmentally friendly France, and also in Asia. But not only are we asleep at the switch, but we have opposition to flipping the switch. JIM: Absolutely. Because while everybody else has got nuclear power plants on the drawing boards, we still have in many pockets and political circles movements to shut down our nuclear power plants. I don’t know why the Greens in this country don’t get what the Greens in other countries get. And that’s one possible solution as we’ve talked about over and over again. There is no magic bullet when it comes to replacing oil and natural gas. But certainly on the electricity side uranium is one of the most viable alternatives that we have. And that’s what the rest of the world is getting, because sooner or later we’re going to run out of oil as more tranches of our society join prosperity – that means they’re going to want to have cars like the Chinese, where I think in the early part of the next decade the Chinese will become the largest manufacturers of automobiles, as well as consumers and buyers of automobiles. So as the rest of the world joins the industrialized society they’re going to want cars, air conditioners – and the problem is, as with anything else, and especially when it comes to oil and natural gas, we’re not only trying to stop production in finding it here, but we’re also trying to stop many of the alternatives, which is one of the reasons why you need to live in areas I think in the future as we approach peak oil that aregoing to have moderate temperatures. What are you going to do if you live in the Northwest, and you have a real cold Winter and you can’t get access to heating oil, or you don’t have enough natural gas to power your plant because our natural gas supplies have gone down, you haven’t built pipelines, or you haven’t built the LNG terminals to get the natural gas to you? [58:57] JOHN: That thought just doesn’t seem to be in the [people’s] minds You saw what went on in the election and the rhetoric. And that thought, that comprehension is just not out there right now. JIM: No it isn’t, because as long as you can flip on the switch, and maybe you have an occasional outage as they just had in Europe a couple of weeks ago, but it’s only when you have an unusual spike in weather, a cold streak, an unusual warm streak – as we had power outages here in Southern California during the Summer because of a heat spell – that this comes home to roost. That’s when it reminds you. And it’s going to happen more and more frequently because otherwise, you know, you have a power spike, you get through it and you forget about it; life goes on and you go on to worrying about something else. But in the bigger picture, think of 250 new nuclear power plants coming online, maybe not in this country but in the rest of the world. What does that mean? That means that demand for uranium is going to be going up, and there’s just not that many uranium companies out there. You know, almost a handful of companies dominate its production and you’ve got quite a few juniors that are moving into this area, but they’re still not enough when you consider what the demand for uranium is going to be in the next decade. So here’s another area of investing that is very obvious – if you look at supply or you look at a chart of uranium prices. So I think uranium or uranium companies are going to be something you want to have in your portfolio. And the fortunate thing for investors is a lot of these uranium stocks have been whacked with the pull back in energy and here’s a real good chance to get in, add to your positions if you already own them, or buy new companies. We’re looking at a company that’s going to be going public here that has a large deposit that goes back to the 70s, when we were looking for uranium – but we haven’t done that until recently. So there are some great opportunities here when it comes to uranium. And this is just something that really hasn’t caught the imagination or the eye of most investors today. You’re thinking about iPods or the latest technology gizmo or Vista coming out from Microsoft, or the latest cell phone – people just aren’t thinking about uranium. [1:01:21] JOHN: Well, there is some recognition because the US DOE – the Department of Energy here in the United States – is beginning to talk about this; and Scientific American in its – was it the September issue? – that had an article looking at energies beyond carbon. So at least they’re beginning to talk about this. There is some conversation going. JIM: Sure. The Energy Department says it’s going to be necessary to build more than 60 nuclear power plants just to help meet the projected rise in the use of electricity, and to maintain nuclear power’s current share of the US electricity market. The good news is that 16 utilities are gearing up to build 27 nuclear power plants, and the Bush Administration has been moving to try to expedite that process. That’s because we’re going to have to do something. If you’re not going to build wind turbines or allow for the building of wind turbines off waters in Hyannis Port – actually as we just found out with Adrienne Carter, the guys that are really using wind energy and making money out of it are our nation’s farmers. I mean the farmers get it. What we’ve got to do is move the nation forward in this idea. In California, for example, we get 16% of our electricity from nuclear power, and in the rest of the nation it’s almost 19%. So what we’re going to have is a movement afoot here in the next 15 years where all these nuclear power plants are going to be coming on line. In the meantime, demand from the existing 440 nuclear reactors that we have around the globe amounts to about 80,000 tonnes of uranium a year. Unfortunately, mine production is currently only around 50,000 tonnes. So if you look at that from a supply demand imbalance factor, that just means higher uranium prices – and that’s going to mean higher dollars for those companies that produce it. [1:03:26] JOHN: Yes, it’s also going to mean the death if you don’t build they won’t come philosophy, which I think has been proven disastrously wrong. JIM: I really think that we’re going to have to get beyond this, but unfortunately it takes power outages, it takes severe weather spells, whether on the heat side or on the cooling side; and I think you have to get beyond the stuck on stupid. What we really need are statesmen that are going to look beyond these partisan political type debates and look at the big picture and say: “Wait a minute, we haven’t built refineries, we are not really expanding the grid system in this country.” Each year our oil production goes down in this country and we’re having to import more raw energy products into this country, and finished energy products, which is contributing to a large trade deficit. And look beyond that, and start thinking how we are going to run our economy if we’re so totally dependent on foreign sources of energy. I mean it’s just not a good situation to be in for a country if you’re trying to develop energy and economic independence. You’re too totally dependent on areas of the world that are not only politically unstable, but in regions of the world where they don’t particularly like us. [1:04:45] JOHN: Well, no matter how you dice it, it still seems that energy – whether it’s oil or gas, alternative forms, nuclear – are really going to be a great place for investment over the next one or two decades. That’s the direction we’re headed. And the sooner you get in the better before everybody else discovers that. JIM: I mean the stocks of uranium companies are cheap; a lot of the stocks of alternative energy companies are cheap – in fact, they have been going through a correction; oil companies and natural gas companies are cheap; some of the nuclear-powered utilities are still cheap with good dividends. So there’s a lot of opportunities out there to take advantage of this trend because once again, it’s just not getting a lot of attention in Washington or on Wall Street, which to me spells opportunity. [1:05:06] JOHN: I usually keep a 100 oz bar of silver here in the studio, it keeps me focused on things, Jim. JIM: Where do you live now? JOHN: I’m not going to tell you. Speaking of gold and bull markets. There are something like 17 companies out there which have deposits of 5 million plus. Second tier companies, and there are some out there in the 2 to 3 million rating. However, I would say that’s not very much given where the demand could possibly go in the markets and everything else like that. JIM: No, and when you consider world gold production is roughly about 2500 tonnes a year, John, and you take a look at the large producers, whether you’re looking at Barrick or you’re looking at Newmont, Gold Fields, Harmony, etc. – and even some of the emerging large producers recently such as Goldcorp – you really have to ask yourself where are they going to find deposits to replace what it is they produce each year? I keep drawing these parallels in the gold industry, that it’s very similar to what’s going on in the energy industry. Just as Exxon-Mobil is going to have difficulty replacing all the oil and natural gas that it produces each year – especially since 85% of the world’s reserves are either 75% in OPEC countries, or 10% in the Soviet Union – and it’s the same thing with gold deposits. There’s been a lot of money spent on exploration, but you know, John, you’re absolutely right, there’s 17 companies that have 5 million ounces or over; and then when you go into the next level of 2 and 3 million ounce deposits, there’s only roughly about 30 companies that have any quality type deposits that have been developed, that look like they’re going to be proven into a mine. I mean there just isn’t a lot to choose from today when you look at the gold universe. Whether you’re looking at a large mining company – and I keep drawing the parallels to the large mining companies being similar to the IBMs at the beginning of the tech bull, versus the juniors are really your Ciscos, your Dells and your Intels. But you know there just aren’t a lot of good properties out there that are well managed and have a lot of upside, and so that’s why I still think that the one thing if you look at this gold bull market, what we’ve seen gold prices come back up to over $600 an ounce; you’ve seen the HUI –the Amex Gold Index and the Philadelphia Gold and Silver Index – you’ve seen that go up; you’ve seen the stock of majors rise; you’ve seen the intermediate producers rise – but the juniors are still languishing because they’re still selling at steep discounts. I mean the thing I love about juniors today is one of my favorite juniors I’m buying for gold in the ground at $20. Another junior I’m looking at is 5 and $6 gold in the ground. So here I have, as of this Friday that you and I are talking, I’m looking at gold over $600 an ounce and I’m taking a look at very few opportunities for the large and intermediate gold companies to expand their production, and then I’m looking at juniors that are selling for you know, you can get gold in the ground for anywhere, from average from $20 to $25, all the way up to a good junior or a takeover candidate which is probably selling closer to $90 an ounce. But you know there’s that wide swath in between there where you can find companies at $25 an ounce, $30 an ounce or $40 an ounce – that to me just seems to make just so much more economic or investment sense than going out and trying to buy a company that’s selling for $400, or $500 gold in the ground, versus let’s say $40 or $50 gold in the ground. [1:09:49] JOHN: If you think about it, just like alternative energies, when you sort of hang over the edge here like this, a lot of people aren’t thinking in these categories. And typically, if you’re into the classic cocktail party or dinner party talking to someone about this, and you mention you think xyz gold or mining stocks are a real good investment then you get the alien look – you know, that aliens are arriving tomorrow look. Has it ever happened to you? JIM: You know, it’s funny, we socialize with a lot of people in the boating, recreation area because I love to sail; my wife likes to motorboat around the bay. And a lot of people in the sailing community are very cognizant of energy prices so when I bring up and tell them oil is going to $100, and going up to $200, they listen to me because I told them last year they’d see 75 and $80 oil. And obviously, if you own a motor boat or a yacht that has a 3 thousand gallon tank you’re very cognizant of what the price of energy is. And here in San Diego the Port Commission adds an extra 10% to the cost of fuel, so you even pay more when you go to fill your boat up with diesel. But you know, people are very cognizant of energy because that’s something that they see. When I talk about investing in energy I don’t sound like a whacko, as they thought I was a couple of years ago when I told them the days of $25 oil were over. And so now I have some credibility with these guys because they say, “yeah, your oil predictions have come true.” But then when you turn the topic and you start talking about the dollar’s fall, you start talking about gold and silver, then all of a sudden they kind of look, “uh, I don’t know.” It’s he’s getting into one of these weird things again. And so that’s a little bit harder for them to grasp. But then I get in to talk about trade deficits, the dollar, I’m explaining inflation to that because they’re seeing that in their real lives and then they tend to be a little bit more receptive. But they also see it as, “isn’t that kind of high risk?” I say there are ways to make it low risk. You can go out and just buy bullion and just hold on to it – it’s a good idea. Then I start talking and relating about historical cycles to them, and then they start to understand; and you know all of a sudden they’re not looking at you like this guy is a Martian that just landed from outer space. So it depends on how you explain it to people. But you’re right, at first glance if you were to bring it up at a cocktail party, and you were going to bring up gold and silver, all of a sudden they look at you like you’re one of those people. [1:12:33] JOHN: Or talk to somebody at Church who’s a broker and say, “well, I just invested this and I bought another couple of thousand ounces of silver.” And they go, “that’s a risky investment!” Those were the first words off their lips. JIM: Sure, they talk about risky investment, and yet here you have the dollar that’s losing its value as the Fed and credit inflation just runs rampant in this country. And yet you know, it’s funny because you’ll say when you try to explain this inflation and explain it in terms of like, “why do you think real estate prices are so high here?” They tend to think that’s just a bull market; that’s not inflation, that’s a bull market. If stock prices are up like they were in the 90s, that’s a bull market – that’s not inflation. So people really I would say today are not as knowledgeable about monetary matters as they were say 40 or 50 years ago. So there’s a misunderstanding, although if you take the time and explain to them the core rate of inflation, they kind of chuckle and laugh that nobody believes that. So they know that inflation is running higher, but when you translate it to, “Ok, inflation is running higher, the Fed’s printing money, the dollar is head for a decline, what kind of investments should one be in,” and you mention gold and silver, and then you start talking about juniors and they just go, “oh, my goodness, that’s high risk!.” And then once again, I think it’s just a matter of education. And when I explain the concept of: where gold prices are, everybody is cognizant of that; this is what it costs to produce it; this is what it costs to find it; and then you tell them now here’s an investment where you can buy gold in the ground at $20 an ounce - gold’s at $630 – you explain it in those terms and all of a sudden they look at you and say, “oh, Ok, that makes sense to me.” So I think it’s a matter of education. And the unfortunate thing is they’re not getting that from the financial media, and they certainly aren’t getting it from Wall Street brokerage firms. [1:14:38] JOHN: And so you come up and say what you say, that’s why you get the flying-saucer look. That’s because they’re comparing what you say with the word on the Street, and they’re trying to reconcile those and they can’t. and they figure this guy must be the whacko, surely CNBC knows what they’re talking about. JIM: Sure, because the other thing that you have let’s say that you spent some time, you explain it, and once you explain it to them people pick up on it and they grasp it. But then they walk away and the next day they’re going to be watching CNBC, or picking up a financial publication, and they’re going to be reading something different. So that’s part of the problem of being a contrarian, and looking at this is your views aren’t part of the crowd. So there tends to be this off look, and well you know, “a lot of people aren’t doing that.” But by the same token 6 months ago if you would have said, “real estate – great investment!” everybody would have said yes – they could relate it because everybody had seen their houses rise in value up until recently. So what it’s going to take is a strong movement in prices, but once again if you take a look at where the values are in this market, it’s really going to be in the juniors. And that’s because that’s the only place with gold prices at $600, that you’re able to buy gold in the ground at 20, 30 or 50 dollars an ounce, and so that’s where I think the big play is. [1:16:06] JOHN: There’s sort of a rollercoaster effect though, that’s in there. The prices fluctuate and that tends to spook a lot of people, especially depending on the amount of money they invest in that. But you really have to base yourself on what you believe to be true, and then just be patient. It’s going to take a while before this thing plays out. JIM: Sure, because I mean if you take a look at what is a junior – a junior is not a producer. It is a company that has acquired or staked a large tract of land; they’ve got drills out there; they’re poking holes in the ground trying to define the deposit. So they don’t have any income, they don’t have any cash flow, and it takes time to define a deposit. But you’ve got to think of a junior in terms of what I call forward ounces. Not just the ounces that they have in the ground, and on the balance sheet today, but the ounces that they’re going to develop up over the next 12, 18 months or 24 months through the drill process. And that takes time. And unless they have spectacular drill results most of the business of junior mining is humdrum business: it’s poking holes in the ground; every six weeks or so you release a press release with drill results – but that’s just the business. And unless you’re whacking out some major gold discovery like Aurelian, pretty much most of the industry is just humdrum: you’re out there, you’ve got your drill crews running, you’re poking holes in the ground and after you get enough holes poked in the ground you come out with a resource estimate which tells you how you’re keeping score: “Oh, they had 2 million ounces, now they’ve added another half a million ounces,” and all of a sudden valuations are instantaneously reevaluated but that’s just the business of juniors. And it’s just why they’re not understood very well, and most people don’t understand valuation of a junior, that’s where I think the great opportunities are in this market. I mean if I was to tell you, John, that gold is selling at $630 an ounce, and you can buy it at in the ground for 20 to $25 an ounce, what would you think? [1:18:12] JOHN: I’d go buy a Lotto ticket. JIM: There you have it, sound advice from John. JOHN: You failed Jim, you failed to convince me. JOHN: Now it’s time to take calls from our listeners. Our Q-Line is open 24 hours a day, 7 days a week, it is available toll-free from the US and Canada at 1-800 794-6480. We ask you to leave your first name and where you’re calling from, and a question. That number by the way does work from the rest of the world but it’s not toll-free and you do have to drop the leading ‘1’ on that. You’re listening to the Financial Sense Newshour at www.financialsense.com. Hello, Jim and company, thank you for the wonderful program. I listen to it every week. This is Rod from Canada. I have a question about defense stocks. Now with all the unrest in the world I was wondering what you think about them. Leaving ethical issues aside, there are some amazing companies like Northrop, Grumman and so on. Thank you very much. Rod, I love defense companies but I think you’re going to see some weakness in the price of these stocks, especially with the Democratic Congress now in control. So we’re going to have to see what’s on the agenda. The thing that I see, as you are pointing out correctly, is with all the unrest in the world, I see world conflicts starting to multiply. And I don’t care who’s president, whether it’s a Democratic president or Republican president, that’s just an issue we’re going to be facing now as the world scrambles for natural resources. You just look at the number of conflicts around the globe: you’re looking at Latin America there are conflicts; looking in Africa, in the Caucasus. And I think as more and more of these conflicts erupt it’s going to dawn on government’s to where defense budgets are going up: China is spending more on its military; Japan is spending more money on its military; other nations throughout Asia. You have one of the largest arms races in naval warfare that we’ve seen since before the beginning of World War I. So all of that is taking place. I would look for a pullback here in defense stocks and look for that as your entry point, but I think the defense industry is going to weaken. You’re going to have to see what happens here with the new Democratic Congress: if they’re going to start shifting priorities at the Pentagon, and especially now with the new Defense Secretary; what’s going to happen with US troops pulling out of Iraq, if that’s going to be the plan; what’s going to go forward? So I think in the short term you’re in for a period of weakness in the defense sector. But as these conflicts multiply I think you’ll see them move again because we’re in the age of warfare. [1:21:09] Hi Jim, Dave calling from Canada. A question in reference to the government absconding, confiscating our purchasing power. In Canada last week the government rescinded on a promise they made 8 months ago not to tax income trusts. With the new law they’ve decided to tax those trusts. This lost in a two day period, $30 billion of market cap. Yeah, I think Frank took a haircut too. Now, that would be comparable to 300 billion in the US market, which is about 10 times the size of the Canadian one. Now this brought up in my mind the question of confiscation of gold. GATA several months ago contacted the government and the government has said they would confiscate gold again – that they would be well within their rights to do that in the event say of a catastrophe such as a terrorist event. Now, since governments have proven time and time again to be liars and deceivers, I believe it’s a real possibility that they would, in the event of a catastrophe, confiscate gold again. However, gold is a small part of actual holdings in the US and Canada. I believe a greater problem would be perhaps the government would confiscate 401Ks or RRSPs in Canada, which would help out the government in a catastrophic financial event brought on by their profligate spending – much more than the confiscation of gold would. However, to protect our purchasing power I believe James Turk’s Goldmoney is a good thing to do. I firmly believe in that, however I would like your opinion, since you talked to James Turk last weekend, is their any other way to protect our purchasing power that we hold in the form of gold or in the form of 401Ks or RRSPs? [1:23:08] I think one way to protect your purchasing power when it comes to owning bullion, you want to have multiple sources or ways to own it, which is one of the reasons we did the show last week, whether it’s James Turk’s Goldmoney, or owning it personally. I like silver myself. And I think you have to look at multiple locations, especially keeping it outside your country is a good idea. Owning gold companies is another form of protecting yourself. And you know, Dave, you hit on an idea that I think we may face one day and you’ll see this coming well in advance where the government says, “you know, our pension system is in trouble because we haven’t fully funded it, we’re going to merge the national pension system with everybody’s personal savings.” I hope that people would riot if they did something like that, but it certainly is an idea that has crossed my mind here with Social Security. And I’m sure you’re thinking about it as it applies to your own country. I also think that owning tangible assets, oil in the ground around globally. When you own a foreign oil company or an oil company in general you own assets outside the country around the globe, in something that is tangible. And the one thing that governments are more prone to do when they get into a crisis is print money. And money printing is the greater danger. And the best way to do that or avoid facing the consequences of that is to own something that is tangible. So gold, silver – owning it personally outside the country – tangible assets, energy; things that people have to have like water and food. Those are the reasons I like those investments. We have to have them to survive. Governments know that they can’t manage that themselves – God help us if the government starts managing our food supply. But those are the areas I would invest in to counteract that. [1:25:02] JOHN: Jim, we’ve got a number of emails from people that want to know when you’re going to get back in the business of writing because they like to actually read those things that you were posting up there on a regular basis. That came from a number of different sources. JIM: You know I’ve been thinking hard about that, and if I go back to writing I want to do something different. Either I could do something that I started at the beginning of the year, and it was Captain’s Log – something short, straight to the point; key items and things I pick up, because I’m a voracious reader. And I mean I literally go home with stacks and stacks of stuff that I take home each night and read, in addition to books I’m reading; or I’m reading at the office. I mean essentially that’s what I do all day is read. And so I’ve thought of something like Captain’s Log might be something I’d start up; or doing something fictional or ‘factional’ – as we talked about a couple of weeks ago – a series called the peak oil chronicles. I’ve been thinking about that because there are a lot of things that are going to play... let’s put it this way, the key event of our lifetime is going to be the collapse of the dollar and peak energy. We’re coming to the end of an era where the US economy – the US Dollar – dominated international trade and international commerce. We’re seeing the rise of more powerful countries, emerging countries, such as China and India. They’re going to play a greater role in this 21st Century. This is not going to be a US dominated Century. I think that much in the same way if you were to look at the beginning of the 20th Century when England ruled nearly 25% of the globe. Nobody would have thought if you had told an Englishman that by mid-Century the pound would be replaced as the world’s currency; and that the United States would become the dominant economic power; and England would no longer be a great economic power. An Englishman would not have understood that at the turn of 20th Century. Just as I think today, if you told an American that now, it would be hard for most Americans to realize that we are no longer a rising economic power, we are a declining economic power, as I believe we will be a declining military power. So those are events that are going to unfold here in our lifetime, and are going to dominate our lifetime as also I believe war is going to dominate our lifetime too. We’re going to see more global conflicts, and we’re entering an age where we’re going to see these conflicts multiply and in the end it’s going to bring in the great powers. How that plays out, I don’t know at this time. But I know that these things are on the agenda and they’re more important and nobody is spending a lot of time focusing. I’m happy to see the peak oil movement is getting a lot more recognition. As I |
