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The
BIG Picture Transcript
FedSpeak: What Did They Say? What Does It Mean? JOHN: Well, it is time to do what we do best, and that is in interpret foreign languages for you: Fed speak. This is a very complex language, requires many years of education to obtain a proficiency in it. So, today, we will look at what the Fed said, and what they are truly meaning. And I guess there's a whole series of bullet items, Jim, we need to look at. So what's numero uno on the list here? JIM: Well, we're going to take a look at the actual press release itself and talk about the change in language which is what people do when they follow what the Fed does: “Oh, they said this word and they didn't say that word.” So you've got a lot of people dissecting this, like a proctologist or something. And I want to point out, John, you have a degree from the Bernanke Babble Institute, and I just want to give out your credentials there as we begin this. Let's talk about the actual Fed statement that came with the release on January 31st. The first thing you have to take a look at when you look at these statements is that the Fed is usually reactive to what current economic conditions are. If the price of energy is going up, then you're going to see statements mentioning energy. If the economy is slowing down, they are going to say it's slowing down. If the economy is increasing or doing better, they are going to say it's doing better. And the one noticeable statement is they were more upbeat on growth. In fact, the language was “recent indicators have suggested somewhat firmer economic growth.” So the Fed – at least this month – is more upbeat on the economy. The other thing that they said is that there is a tentative sign of stabilization appearing in the housing market. Now, we're going to dissect what is really going on – but let's get through the statements because these are the kind of things the markets were focusing on. So number one, they are more upbeat on the economy. Number two, the housing market is stabilizing. The long term growth is unchanged – moderate long term economic growth, which is kind of a bland statement. There was no change there. What was also noticeable, obviously with the price of oil falling in the month of December and January, they took energy completely out of the picture. And finally, Michael Moskow voted with everybody this time – it was a unanimous vote. So that was basically some of the little nuances that they made in the statement. The two of them were: housing stabilizing; the economic recovery seems to be picking up a little steam. So they were more upbeat on economic growth; they were more sanguine about housing stabilizing; and they took energy out of the picture. Other than that, that was pretty much the gist of this month's statement, and of course we got the markets to rally. [3:01] JOHN: Jim, you just wrote a forecast piece as a matter of fact, and you were talking about some of these events in the fourth quarter, which they are saying propelled a lot of these changes. And they were really sort of one-shot type of events such as the weather changes, et cetera, the unusual warm weather. But this is not the norm – this is just a ripple in a trend. JIM: Sure. And we had a couple of things in the fourth quarter. From hitting a peak at around 5 ¼% in late June, early July, the ten year treasury note fell from about 5 ¼ down to 4.4% the beginning of December. So we had interest rates come down almost ¾ of a percentage point. That translated over into the mortgage market – mortgage rates came down. We had the price of energy in August hit $78 a barrel and drop down to 50 in the first couple of weeks of January. And then of course, we had the warm weather. And so a lot of these were one-off events, I believe, and I think that as the first quarter ends as we get into the second quarter, you're going to see more pronounced weakness. And we're going to tell you why. And one thing I want to talk about is in the last couple of months in the November and December sales figures for real estate, what happens is, let's say, John, December 1st, you and your wife decide to trade up or buy a new house. So you sign a contract to buy a new home and then you go home and think about it and you get a little scared and you have buyer's remorse. You go back three or four days later within whatever the window period is in your state and you cancel that contract. The problem is statistically they count the contract that you and your wife filled out. They don't subtract from the contract at the end of the month and say, “okay, we had 100,000 new home sales in the month of December, but at the end of the month we had 30,000 cancellations.” So I think a lot of these new home sales, added too with the weather and the seasonal adjustments to housing starts, that a lot of this was very misleading data. [5:16] JOHN: So what does that mean in the terms of the longer term projection if we sort of iron these little ripples out? JIM: I think that they are looking at two months worth of a trend. As I mentioned, we had these unusual events. And all of a sudden they are extrapolating out and they are saying that this is the trend, the real estate market has now bottomed. And the problem is the market's interpretation of all of this is strong economic growth, no near-term rate cuts, so the market got a little disturbed about the fact that “well, we're not getting these Fed rate cuts.” However, the Fed is getting more dovish – you can pick it up in their language. And the other thing is why cut interest rates if the economy is growing strongly, the inflation numbers are rolling over and coming down, so don't do anything. So the market's interpretation is things are going well; and the Fed's interpretation is things are going well. [6:!5] JOHN: Yeah. But I detect something that says that's probably not what you think. Am I right? JIM: Yeah. Well, first of all, I question the new home sales because you talk to all of the builders when they were making their earnings announcements – I don't care if it's D.H. Horton, Pulte Homes, Standard Pacific – they are all talking about major cancellation rates. So you’ve got to dismiss this little surge that we saw in new home sales. And remember, a lot of things that were favorable at this period in the fourth quarter – falling interest rates, falling energy prices, and warm weather – they've all reversed themselves. As we saw in the Expert Series, Joe Dancy was talking about how the temperature in Chicago is not going to be above 10 degrees for the next week. Energy prices are back up to close to $60 a barrel. You have interest rates that are inching their way back up towards 5%. So the real estate market is it not what it appears. And not only are they misconstruing these new home sales, but also the strong data we saw in the new home sales were mainly in the Northeast where weather improved during that period of time (it was warm weather). Now, if you take a look at what builders are saying, you've got almost a different interpretation. [7:28] JOHN: You know, that's a key point there. You talked about builders. What is it that they themselves are saying. JIM: You know if you take a CEO for example of DR Horton, Don Tomnitz and his earnings release – and I'm quoting him here – he said: We're in the very early stages of the current housing slow down. Most of these downturns are longer and deeper. And right now, we don't see anything on the horizon that would change that opinion. We continue to see a very challenging industry environment for fiscal 2007. So the guys that actually make the homes and sell the homes are saying something entirely different than what the Fed and the Wall Street crowd is saying. And it's almost like these guys on Wall Street get a little upset with these home builders, saying, like, you know, you don't see it the way we do. Well, you know what, I'd rather put my trust in some guy that's in the home building business: he does it for a living, he's watching what's happening to his sales, he's watching what's happening to cancellations, he's looking at his inventory. I think these guys have the better perspective in terms of what's going on. [8:31] JOHN: I would think another factor that's going to come in here too is all of these ARMs (adjustable rate mortgages) that are coming for a reset right now or readjustment; and at the same time they are toughening banking standards in line with what we saw just a few years ago when Congress revamped the bankruptcy laws and things of that nature. JIM: Sure. In fact, last year the Comptroller of the Currency raised lending standards, and those lending standards are getting very tight. And the problem is 20% of all new mortgages issued in 2006 were subprime mortgages. And the subprime variable foreclosure rate is now at a four year high of almost 2.2% and rising. And so a lot of these people that got into the subprime loans on their homes who are barely squeaking by – they got in by the skin of their teeth – they are going to have a tougher time now that the Comptroller of the Currency and the government is coming in and saying: “you know, banking industry, tighten up your standards.” So a lot of pressure is being put on banks, and so a lot of these loans may not be able to renegotiate. There have been several stories – you read them almost every day in the paper – about some individual that barely got into a home, and he's just hanging on and hoping that they can maybe roll their loan over. And some of these people are not going to be able to roll them over. [9:59] JOHN: Let me ask you a question. Are they going to be able to bail out of the house as well? I mean, if you can't roll over the loan, you've obviously got to be able to get out of it. So looking at where the market is right now, are they going to be able to really jammed or what? JIM: I think you're going to see more subprime foreclosures. Everywhere I look, the foreclosure rate is going up on subprimes and I think it's going to accelerate this year. So you're going to see bankruptcies go up. And for a lot these people, since they got in with the crazy financing with no money down or hardly any money down (or if you did put some money down, as soon as you moved in, you got a home equity loan and took all of that equity out again), it's much easier to walk away from the home. So as that happens what's going to happen is a lot more inventory is going to be coming on the market. One of the key indicators if you want to know where housing is or when we bought bottom is take a look at the monthly supply of homes. Right now, it's about six months worth of supply. It's been varying between six and seven and it goes up one month, and then it drops a little bit, and then it goes up again. And a lot of it is all of this inventory coming in from foreclosures plus what builders are doing. And what's making it more difficult for a lot of these people in the resale market is the builders, who are trying to unload their inventory, are covering your closing costs. I've seen programs here where they'll cover your first year's worth of payments. They are giving away cars. They are upgrading appliances, granite counters, all kinds of goodies and that's making it very difficult for the existing home sales to compete against that. In talking to the lenders and real estate agents here, they pretty much confirm that thought: that new home sales are much more attractive because you can get into a brand new home with much more attractive packages. And unfortunately, I mean, in the neighborhood I'm in, we have 10% of the homes for sale and not one of them has sold – and the first home went up for sale in April of last year – they haven't moved a bit. So I think we're just beginning to scratch the surface this year, so this idea that the Fed and the markets are saying with all of this happy talk that we've hit bottom and real estate market is stabilizing, I think we're far from it. In fact, the chief economist with Fannie May David Berson said sales won't recover until 2008. That's what they are forecasting. And if you look at these 30 year adjustable-rate mortgages, we've gone from almost 4% to 5 1/2% in just the last year-and-a-half. That may not be much until you start considering a person that has a half a million dollar mortgage – another point and a half makes big deal of difference in the monthly payment. [12:40] JOHN: Are there any other indicators we should be monitoring on this subject? JIM: Watch the ISM manufacturing index – the latest reading we got this week – that's dipped below 50. Below 50 indicates a contracting economy. We dipped below 50 in November and then in the month of December we went back up over 50. Now we're below it again. Keep your eye on that. Also, I expect that by the time you get into early spring, look for the economy to start turning down and a lot of these one off events will have worn off: the weather, the drop in energy prices and of course the lower interest rates. And so some people are saying the Fed is going to raise. I think by the end of the first quarter, second quarter, if this trend continues, you're going to see the Fed get into a panic mode because unlike the stock market, John, a fall out in the real estate market carries directly over into the financial system, and a weakening US economy also has perceptions for the dollar. [13:43] JOHN: Why do you think the Fed is more likely to raise interest rates. They’re giving you all of this hype about being tough on inflation, but they are going to go wobbly on this whole thing eventually. JIM: I think they are talking tough right now to say hey, we're concerned about inflation, because every central banker around the globe is flooding the markets with money and credit. And what I think they've got going for them is the rate of change on core CPI – and CPI is coming down. So that's going to give them the cover to start slashing rates. And specifically, if a lot of these one off events that we talk about – weather, energy and interest rates – begins to wear off, and the cold weather, rising energy prices, and rising interest rates once again start to weaken the economy…So I think that in the next couple of months, you're going to see the CPI headline number come down, the core rate come down, because year-over-year comparisons are going to be a lot easier from 2007 to 2006 versus 2006 to 2005. [14:46] JOHN: And of course there's always the what to do question that we pose here on the program. JIM: Well, the price of energy is going up. Forget the happy talk on Wall Street. You hold your energy positions. Definitely hold your gold positions. If you're in the markets: consumer staples. And also build up your cash because I think, John, the next thing – one of the topics we'll cover next in the Big Picture – is reinflation is going to come next. And with reinflation is going to be where does money go when they reinflate. It goes primarily into financial asset markets. So now I'm still predicting as I did last year, well, it's easy to predict a new record in the Dow because anything that happens from now on is a new record, but I also think that by the end of the year, we could see a new record in the S&P. But there's going to be a better buying opportunity. We're building up cash. We're holding our energy, we're holding our gold, we're holding our consumer staples and we're actually adding to certain positions that we see as very attractive here, and also holding some cash because I think that the next reinflation will begin by mid year. [15:50]
Bernanke: The existing approach of the Federal Reserve System as the primary contribution that the Fed can make to maintaining stability of the general economy. Speakers: What? I didn't understand that. What did he say? Do you find it frustrating listening to Bernanke Bernanke's testimony? Does it sound like something from the Exorcist. Well, you need be frustrated no longer. Now with the new Bernanke Babble dictionary, you can clearly understand every word the Fed Chairman utters. Here's how it works. Using our Bernanke Babble dictionary that means: He's inflating the currency beyond belief, and don't count on collecting your Social Security because it won't be there when you need it. Speaker1: I understood that. Speaker2: Yeah. Me too. For just $19.95 plus shipping, the new Bernanke babble dictionary can be yours. It's such a feeling of security to know what Ben Bernanke is really saying. Yes. For just $24.95 plus shipping a life of economic security can be yours today. Speaker 3: If I didn't have my Bernanke babble dictionary, we'd never know how badly we're being taken. Remember only $29.95, and the Bernanke babble dictionary is yours. And if you call in the next 10 minutes we'll throw in absolutely free the guide to hedonically indexing your income tax return guaranteed to reduce your income tax by 50% and trigger an audit by the IRS. Again, the Bernanke babble dictionary complete with hedonic income tax is 34.94 plus shipping. Call now to lock in your price before the currency becomes totally worthless. Call 1(800)YOU'RE-TOAST. [17:28]
JIM: Well, there's a new Congress, there's no initiatives, how are we going to pay for all of that. Joining me on the program in other voices this week is Grover Norquist. He's president of Americans for Tax Reform. Grover, let's begin with the issue of raising or lowering taxes lowers revenue. We saw during the Reagan administration when taxes were slashed revenue doubled to the government. And when the President proposed cutting taxes back in over several years, what has happened, we found out the government is getting record revenue. So let's talk about taxes and their impact on the economy. GROVER NORQUIST: Well, certainly high tax rates slow economic growth. If you tax something, you get less of it. This is the theory behind fining people for speeding: they do this because they want you to stop speeding. And then they get surprised when they put…At one point in this country we had a 90% tax rate on the last dollar you earned. The income tax went as high as 90%. It was brought down from 90 to 70 under Kennedy. That was the Kennedy tax cut: 90 to 70; Reagan took it from 70 down to 28. And interestingly, when the government says to you, gee, if you earn an extra dollar, we're going to take 70 cents, we get to keep 30, it makes work more expensive. It makes taking Saturday off less expensive because instead of costing you a dollar not to work, it really only costs you 30 cents because if you work, they are going to take 70% of what you earned. When Reagan took office, top rates were 70%; when he left the top rate was 28%. That means if you earned an extra dollar, before Reagan, you got 30 cents. At the end of the Reagan term, when you earned an extra dollar, you got 72 cents. You more than doubled the return to work. You more than doubled the return to investing, to saving money, to putting money in a bank or buying a stock, or spending an extra hour at work. And what happened? You saw more work. You saw more investment, you saw more wealth, more jobs created, which is exactly what common sense would tell you; and exactly what Ted Kennedy, the liberal Democrats, the New York Times, and the Washington Post told us would never happen. And while they've gotten over losing the Cold War, they have never gotten over being wrong about marginal tax rates. It just bothers them so much today that if you repeat what I just said, they will sputter and not say, “well you're right.” Whereas if you point out that East Germany was not a nice place, they'll go, “yeah we know that.” [20:15] JIM: One thing that is rather surprising, let's go back to before the Bush tax cuts – the recent ones – when the top marginal tax rate was 39.6. But that's not the top rate because you had a Medicare tax that came on top of that, plus Social Security; and if you live in California, you can add, well, it's now 10.3. Why do some people feel that somebody would be motivated to work harder when every marginal dollar that you earn or expand in your business the government takes 50 and 60%? I mean, why work? GROVER: Well, people who don't work that much, people who live off the tax payer's dollar do not think of this. They literally do not think of this. This makes no sense to them. What you earn and so on, they don't notice the tax on it, and the answer is just – you're surprised, but – they just don't know, they don't get it, they don't think about it. They don't want to believe that raising taxes has any negative impact because of course they desperately want to raise taxes to spend it on the really good things that they've thought of over the summer vacation. [21:40] JIM: But what is shown historically, whether it's the Reagan tax cuts, the Kennedy tax cuts, the Bush tax cuts, if they want more money to spend, tax cuts brings in more revenues. GROVER: Isn't that amazing? You'd think a smart liberal would be like John F. Kennedy. I want more money, I will reduce marginal tax rates. The economy will grow at lower tax rates; there will be more resources flowing in to the government; people will be richer and the government’s richer – and all I can figure is that the hate and envy class division part of the American Left is so powerful that they would rather have high taxes to punish bad people who work hard and invest and get rich – they'd rather punish them and cut their taxes even though they know that that would lead to more jobs, more economic activity and you would have more people employed. And all Americans would benefit as lower income people would get jobs for the first time and people would have more money and more savings. They just can't stand the idea that some guy they knew in high school is harder working and making more money than them. And they want to punish them. [22:59] JIM: You know, speaking of hard working, a lot of the jobs in this country are created by small businesses. There is a proposal now to raise the minimum wage almost by, what, 30, 40%. And to counteract the impact of the cost, the Administration is proposing some tax cuts, so that businesses aren't harmed. Why such an opposition if the Administration is willing to go along with the wage raise? Why not give the tax incentive to offset that so small businesses can continue to grow and hire and create jobs? GROVER: The Left does not want to admit that raising the minimum wage harms the economy. It just drives them nuts. And of course, an offsetting tax cut to reduce the damage by raising the minimum wage. Again, raising the minimum wage is going to be free money for some people and nobody's going to pay it and there are only benefits and no costs – just as raising taxes will be all benefits and no costs and everyone will cheerfully send in their money and no one will be damaged by it or hurt by it. It's not a very grown-up way to approach life. You'd think by the time you were twelve you'd realize that when you eat ice cream cones you get fat – there's a price for everything that you do. But liberals don't seem to ever want to face this. Raising the minimum wage puts younger people out of work. It did when we imposed it. The South Africans, in order to keep blacks out of competing with white unionized workers, passed one of the first minimum wage laws in the world with the express purpose of keeping black people out of work. When we passed the Davis-Bacon act, which was sort of a minimum wage for government contractors, on the floor of the house in the Senate, they said this is to keep black people from moving to New York and getting jobs. So they know that this damages the weakest people and the people who are just beginning to enter the work force. And they don't care. And what Bush and some Republicans have said is politically we're not capable of standing up and explaining to people that this is bad, so here's what we'll do: we'll let you pass your bad stupid restrictive bill, but we want some tax cut to mitigate the damage that this does. It's better than nothing, but there are a lot of Democrats who again fight the idea of tax cuts for small business, for low income people, for anybody because they view that money as their money, not your money. Your tax dollar, they consider their money. [25:44] JIM: You know, the amazing thing about this, if you look at American economy though, where you have large multinational corporations who have been downsizing, closing down plants, shipping jobs overseas, the businesses that are doing the yeoman’s work in terms of creating jobs and employment have been small businesses – that are hiring Americans keeping those jobs here. I just don't understand why, if they want more people to work where, they want to harm small businesses. There's even talk, in addition to the minimum wage, also raising the marginal tax rates on the so-called rich, who as we know are many of the small businesses that are responsible for creating most of the jobs? GROVER: Small businesses – who you do not tax – do not appreciate you and vote for you. People who you give welfare checks appreciate you and you can call them on election day and make them vote for you. So left wing politicians would rather loot people who produce well because if you let them keep it, they are insufficiently appreciative. They never come by and tell you how swell you are. They never write you thank you notes: thank you for all of my lovely house that you didn't steal. But people, when you take money from people who earned it and give it to people who didn't, people know perfectly well they didn't earn it and they are very appreciative of fact that you went and stole it for them. So that's why politicians love to be able to handout goodies: it makes them feel superior to other people because they are not JD Rockefeller. They didn't create billions of dollars and then give it to poor people. They have to go take by force the money they want to give to poor people and then they want everyone to tell them how swell they are because they are being generous with other people's money. And of course, it's not generosity when you're playing with other people's money. It's something close to theft. [27:32] JIM: Let's talk about a disturbing trend, and one that I don't know where we're going to get the money. They are talking about at a time where we need to be cutting spending in Washington, they are talking about national health care as the Governor of California is talking about here in the state of California: a 4% payroll tax to pay for it. Are they not aware that the economy has been slowing down? The last thing that you do when the economy is struggling, or when people are having a hard time, is to raise their tax burden. GROVER: They should know better. It's not clear to me at all that they do. The Governor of California is not a native English speaker. His first language is German and he is now explaining that these massive tax increases that he wants to put on the people of California should not be called taxes. They should be called loans. Now, we need to get him one of those English immersion courses so he can learn that loans are when you go to the bank and they give you money and then you pay them back. Tax is when the government steals your money and maybe they give some of it back to you if they chose to. But that's not a loan. When someone tells you, "you must give the money," - that's not a loan. Maybe it's extortion, but it's not a loan. [28:54] JIM: Well, he's playing the same thing here in the State of California where he's running budget deficits and through creative accounting he's not showing those deficits, and at the same time, California is borrowing very heavily in the bond market. And as you and I know Grover, when you borrow 40 billion, or whatever that number is, that means there's now an interest obligation on the state which means that they are going to have to find tax revenues to pay for that. GROVER: It is a real serious problem and I understand that, you know, Governor Schwarzenegger looks at a Democratic House and Senate and feels frustrated at not being able to accomplish some of the things he would like to accomplish. But sometimes your job is not to just sort of pass stuff, particularly if the only things available to be passed are damaging and bad for the economy. Sometimes your job is to just say no. Your job is to be policeman. Policemen don't get to create wealth, but they get to protect it. And the Governor needs to recognize that now is the time to protect the wealth and income and the homes of the people in California from all of these characters who wish to take it. [30:02] JIM: I guess maybe a final question. I understand that you were in on a conference committee with – or a group of you were in – with Hank Paulson. And when they were talking about Social Security, any time I hear the word reform in Washington, Grover, I want to hide my wallet. And one of the proposals that's being thrown out there is right now the cap on Social Security I believe is $97,500, and they would take the cap off completely. So if I look at a businessman that runs a successful business, if the Bush tax cuts are not put in permanently, we go back up to 39.6. Add to that 15.3% Social Security if they take the cap and here in California you can add 10.3 on that, you're back to where we were when Kennedy was president where the government took 70% of what you made. GROVER: It is a real big problem. The Democrats do not want to reform Social Security by allowing you and me to have our own personal accounts so that we can save the money that would go into our FICA taxes and have it when we retire – that's not what they want. They want to just keep the present system going even though it gives younger people a very bad, even negative, rate of return. They want to save the system at the expense of everyone else – particularly of young people. I mean older people, nothing is going to change for them. This is a reform that would only affect younger people and give them the opportunity to move to personal accounts. The Democrats would rather just raise taxes than do that. [31:50] JIM: That's amazing because in every study, and there's also the chance you talked about negative returns on Social Security for young people, the absolute insult on them all is by the time they did receive it, the government would tax them on their own money. GROVER: Yes. We have got to move it. When I talked about it to the President, to the Secretary of the Treasury, to members of Congress, everybody acknowledged that raising the cap was a tax increase. There was an effort by some people of Washington D.C. to slip into the conversation we're not going to raise taxes, we’re just going to raise the amount of income subject to the tax. That is a tax increase. The President certainly knows it and has said so; the Secretary of the Treasury knows this; everyone in Congress knows this. I believe that idea is about as dead as any idea gets, but in Washington D.C., really stupid and destructive ideas are only mostly dead. They are never completely dead. [32:47] JIM: And like a zombie, they keep coming back. Well, Grover, keep up the good work. It was rather interesting – I am trying to think who did a poll, and they talked about tax rates and 57%. I think it was 57 or 60% of most Americans feel that tax rates were too high. GROVER: Well, they are too high and people understand that. And we keep telling the politicians that and, you know, they just sort of say: I really want your money. That's what Eisenhower said when he vetoed the tax cut that Taft and others passed when he started his administration. We could have gotten rid of that 90% rate at the beginning of the Eisenhower administration and we went eight years. Yet, if you wonder and whine why the Republican party is insufficiently conservative, their president – the Republican party president from 1952 to 1960 – sat there like a bump on a log and didn't change a 90% tax rate. He didn't understand that that might be a problem, he didn't think the role of the Republican party was to bring that down. Just amazing. [33:59] JIM: Yeah. You add 90% to California’s 9%, I mean, quite honestly why work? GROVER: You want to see the future, go to Europe. They don't work. JIM: That's absolutely amazing. Listen, Grover, thanks for joining us on the program. If our listeners would like to find out more about the American Taxpayers Association, why don't you give out your website and tell them how they can find out more. GROVER: Certainly, ATR – Americans for Tax Reform (www.atr.org) – come and visit us, you can sign up, we send out a weekly report on what's happening on taxes around the country and Washington and we update the website regularly as to what's going on. [34:33] JIM: All right. Well, listen, you're doing yeoman’s work, protecting Americans from higher taxes. Keep it up, Grover, love to talk to you again. GROVER: Take care. I look forward to it. [34:41]
JOHN: Well, you would guess from the happy talk coming out of the main line media that the markets generally appear to be under the assumption that the economy is rebounding. And I know it's a little early, but we probably need to look at what the second half of the year is going to bring here. The next reinflation, I guess, is what it would be because the Fed is going to try to make things happy. JIM: Well, I think what you're going to see as we talked about in the first segment is that a lot of these one off events that we talked about (the weather, energy and interest rates) as they wear off, as we get to the end of the first quarter: I think you'll have more companies warning about profits; I think you'll start to see consumer slow down, especially in the real estate market. That will continue its trend, probably worsen this year than it was last year. You'll see more foreclosures, and that's going to start carrying over into the economy. So by the time we get to summer, I would suspect that this economy is going to be slowing down. And as we get close to that, they are going to be cranking up the money supply. This is very similar if you look at what happened in the 1970s, as we talked with Gary Dorsch in the Experts series in the first hour, he was talking about global money flows. John, they are high single digits, if not double digits, for most of the regions of the world. You’ve got 17% money growth in China; you have almost 11% money supply growth in the United States; you have double digit money supply growth in Europe, in Australia, in Canada. So they are all inflating which is what they did during the 70s and at the same time they were raising interest rates. So it's like the interest rates are sort of to put the brakes on some of the speculation. So the global money supply is growing, but unfortunately, when you have a financial economy like ours in order to avoid a crisis you have to apply more money growth at even faster rates in the future to avoid that day of reckoning. We're so leveraged right now – whether you're looking at the Yen carry trade, you're looking at derivatives, you're looking at the mortgage markets – that there's just no way they can apply the tough medicine that we did in the 80s like Volcker did, or for example, what the Greenspan Fed did in 1994. We just can't do that. So look for these phoney CPI rates. And by the way, if you look at rate of change, which is if your benchmark is a higher number versus the previous year, then the benchmark rate of change this year should be at a lower rate, so you're going to see CPI start to come down. And one thing that you have to think about is when the Fed reinflates, where does the money go? And we've got two places. It can go onto the real economy in terms of goods and services, and if it does that, generally prices rise. However, we live in a global marketplace today, so that when you have excess demand for goods (as you have now in the United States), that excess demand for goods gets channeled into imports. And so that's why the United States, as the world's reserve currency, we are allowed to export our inflation to the rest of the world. And so the predominant evidence of inflation manifests itself in the financial markets. And as the Fed reinflates – as I expect that they will start sell rating – in fact, there's evidence that they are already starting to do that right now because money supply growth here in the US has moved from the high single digits – it's now in the double digits. So the financial economy and with global markets money first will flow into asset markets and that's why I expect higher asset prices by the time we get to the end of the year. If you and I were having this conversation December 31st, I would expect the Dow at all time records, I would expect the S&P at all time records. [39:13] JOHN: Well, if we are looking at the prospect of a reinflation, typically the Fed needs some excuse for doing what it's doing. We call this “off loading” at times when it's blame. But it also needs to do the same thing if it's going to, say, allow reinflation to happen. There's got to be some pain. Somebody's feeling it out there in the markets. Some triggering event causes it and therefore the Fed can go well, guys what can we do but help you along here, we'll give you some more inflation – and everybody's happy. What do you think we're going to have this time in terms of one of these events. JIM: I think the key area to watch this year is real estate. And I'm one that doesn't buy the happy talk about real estate stabilizing, especially if you listen to the home builders. And just look around you: here in Southern California, gosh, we’ve got more inventory of condos and other things that residential homes in the market keep softening. So look for the real estate market to worsen; and I think also for an increase in bankruptcies and defaults which will bring more homes on the market. Watch – as we mentioned earlier, the inventory of homes on the market, how many months and see if that figure is trending down, which would mean we've stabilized and we're now on the road to recovery; or, if the inventories remain stubbornly high which is what I suspect, we're going to see here because it's not just the fact that the builders are liquidating their inventory. Remember, other inventory comes on line as people default, people get nervous, maybe they are – you know, they've got a variable rate mortgage, they are taking a look at this their prospects of what their mortgage payments are going to be, and they are saying, “you know what, I'm getting out, let's put the house up for sale.” I happen to know some of the real estate agents that I talked to, that's the kind of stories that they are telling me. So look for real estate to worsen – bankruptcies to worsen; and even maybe possible financial prices with subprime lenders, even carrying over into the banking sector. Also look for the economy to begin to slow down. We've got the ISM number right now it's back below 50. If that starts trending lower that's a sign – another sign, along with real estate, that the economy is slowing down. And then all we need for that, John, is some kind of stock or bond market major correction, and you'd have all three of those in place and everybody would be clamoring for the Fed to take action. And if they have the cover of a falling core CPI, then I think you will see them do that. So I'm not buying that things are so well that we're going to be raising interest rates. And I think the real key that we're going to get is watch Bernanke here in the next couple of weeks when he goes before Congress because already Barney Frank has said: “don't you talk to me about labor rates and you're going to be raising on that because that ain't going to fly with me.” So I think he's going to have a tough going when he goes on Capitol Hill here on the 15th. And of course we'll be analyzing that along with the key sound bites. [42:13] JOHN: How long do you think it's going to go before the pressure to revise the bankruptcy laws again. They made it much, much harder, but I think as it does get harder and harder on the people they are not going to sit around and say, hey, you're not going to not let us out of this whole system. JIM: Yeah. I would say that if it really starts to get bad by the end of this summer, look for the Democrat to move to some kind of bill to ameliorate that kind of situation and make it much easier for bankruptcy because you're going to see a lot of them going forward. [42:44] JOHN: That's what I was wondering. It's like they are caught in a squeeze right here, you can see this one. Let's look at a parallel sort of side running issue here. If we are talking about problems in real estate, people walking away from things, obviously that creates a problem with mortgages and that is a large part of the portfolios and investment areas that banks have. Will this create some kind of a banking crisis that will run in parallel to what we see in the housing industry? JIM: I think the problem is going to be mainly with your subprime lenders and your financial intermediaries because one of the things the banks have been good at is off loading all of their mortgages into the securities markets. So, if you want to look at where the real risk lies I think it is all of these mortgages that have been wrapped up and securitized and sold to investors. I think as it gradually unfolds, investors are going to be left holding the bag. [43:40] JOHN: Well, as they get ready to reinflate – and in reality if we look at it nothing really has been tight, let's face it, things have been on an inflationary course since 1913 with the exception of just a couple of years, I think, during World War II. Money is still growing – we know that even though there is no M3 money supply that we can track right now unless we do it ourselves. But all of that aside, I would say that we are growing to the point where this money has got to leak into different areas, right? It's got to go somewhere when it's created. So where would it wind up? Assets. JIM: That's why when we titled this piece: the next reinflation, prepare for the next asset boom. If you look at these trends of liquidity, as we’ve been pointing out, money supply growth growing all over the world. What makes it a little more difficult now is all currencies are fiat-based so it's just who is depreciating faster than the other. And if you look at the trend of liquidity here in the US – which is the US monetary base plus US securities held at the Fed or foreign securities (ownership of Treasuries) held at the Fed – that base rose by 80% from 2002 to 2005; it rose by 16% in 2006. If you look at liquidity at the corporate level, corporations are sitting on tons of cash, and what you're seeing corporations do, rather than invest in a new plant and equipment (which is why job growth and manufacturing has been anemic), corporations are using that money to buy back stock or they are increasing dividends. So you have a tidal wave of liquidity that's in the system. I mean just take a look at all of the M&A (mergers and acquisitions). If you pick up the financial papers almost on a daily basis and somebody is buying somebody. So the liquidity out there continues to grow and continues to accelerate. So where does that liquidity go? Well, it goes somewhere and it's going to go in the financial markets. It's going to go into private-equity deals. It's going to go into corporations buying other corporations. It will go for corporations buying their own stock, increasing their dividends, and that's what we're going to see and that's one of the reasons why last year when I was watching liquidity and credit growth I said, you know, this money has got to go somewhere. It obviously isn't going into the economy because companies aren't building new plants and new factories here – if anything, they are shipping them overseas. So look for in this reinflation another asset boom because that's what you get with inflation. And we don't call it inflation if the Dow or the NASDAQ goes to 5000 – that's a bull market. If your home goes from 100,000 to 250,000 – that's a bull market, that's not inflation. But it's just another manifestation of it. So I see another asset boom. And when the Fed starts cutting, I expect a couple of things. It's going to reinflate the markets so you're going to see the markets take off. Not only a new record here in the US, but also globally. Hard assets are going to do very well. International consumer staple companies are going to do very well. Commodities, gold, energy and a theme that we elaborated in our first show of the year: one theme I think is going to do very well is infrastructure and especially alternative energy. [47:05] JOHN: So, Jim, if we had to sum up the whole scenario, we would see trouble in the first half of the year. That would put pressure on the Fed to do something, which means they will reinflate toward the second half, and money will most likely run into an asset boom – that's what it's going to produce. JIM: You summed it up. JOHN: Up next we're going to go to our Q-Line. The Q-Line is a voicemail line which is open 24 hours a day for your convenience. And you're able to phone in questions to the Financial Sense Newshour at toll-free (US and Canada) 18007946480. That number does work, by the way, for the rest of the world, but you do have to pay for the call. And you're listening to the Financial Sense Newshour at with www.financialsense.com. Hey, Jim, John, this is Art from Calgary. I Love the show, and listen to you every weekend – all four hours. Maybe I should get a life. Look, I've got a question concerning Jim's belief that real estate isn't going to be that. While I agree that, you know, there's always a place to invest, I’m looking particularly at residential real estate, the question is this: Don't you believe that there is a connection between the ultimate value of real estate (residential real estate), and the earning power of people that are being asked to buy this real estate. I'm from Calgary, Alberta Canada and we're seeing incredible problems here in the company I work for trying to hire employees – whether you’re trying to bring senior employees in from other cities or hire new employees. And the situation is just that the real estate market has got so high that even though we pay the best wages in all of Canada – in the oil patch here in Calgary - these people look at the salary and go, “that's great.” Then they look around the city and they go, “but I can't afford to buy a place to live here.” And it's become a real situation such that our unemployment rate is zero – not zero, but they call it technically zero. And it doesn't matter if you're looking at carpenters or production accountants or senior managers, they just don't want to come to Calgary because of the cost of real estate – and as compared to what their salaries are. You're looking at five, six times combined income per family to buy a house. I'm thinking there must be a limit. And so I'm looking for your comment on that and maybe comment in general about the Calgary real estate market where we are, and how that will play out – whether wages are going to come up or whether we should expect a retraction in real estimate. Your opinion is much appreciated. JIM: Art, income and qualifications to buy – you're right, there's a connection there. You don't make the income, you can't afford to buy. I can remember a similar situation here in San Diego where one of the Big Six accounting firms brought a gentleman from back East because of his specialty of biotech companies but he came out here, took a look at cost of living of homes and everything else plus taxes in California, and he said, “you know what, I'm going back.” So that is going to be an issue. But maybe there is something that they can come up with some kind of way of affordable housing, maybe you go to manufactured housing, maybe you go to condominiums or something to bring the cost down, but something has got to give there. Either the price has got to come down or they give subsidies to people to live in the area with tax breaks or wages have got to go up. The two are related. [51:04] JOHN: Reading articles – Joel says, from Berlin, Germany – on the Financial Sense website : In listening to Jim's most recent thought about the short term trend of the US stock market over the next several months, I feel almost overwhelmed by the number of announcements by the writers who have a crash format book being released in the month of February. As a firm believer that news tends to be an initiator of future events by changing the public’s thinking and attitudes about a market, my question is do you two believe all of these upcoming books create public actions which ultimately will be self-fulfilling between February and mid-year? JIM: You know, certainly a number of those books coming out, people read them and all of a sudden they strike fear in everybody and that could cause some action. Sure, that could happen. I do expect something to happen here in the first half of the year. I don't know what's going to trigger it. Whether it's an attack on Iran, geopolitical event, a bankruptcy, whatever it is, but the market’s due for a correction. The Fed will then reinflate the markets will go up. And getting back to your question, if enough of these books come out, and enough people read them then, sure, that could precipitate some self-fulfilling action. [52:12] Hello. This is Steve calling from Placerville, California, in the heart of the gold country. I have a question regarding deflation and stock market crashes. The 1929 stock market crash was followed by a deflationary depression, as was the 1989 stock market crash in Japan. And now we're seeing some deflation in the housing market. Given the massive amount of debt and credit that exists in the economy today, it just seems to me that a rogue wave or exogenous event which causes a stock market crash could result in a severe deflation and a contraction. My question is: why are you so confident that the Fed would be able to prevent this, and you see an inflation outcome as opposed to deflation. I'd appreciate your thoughts and I always enjoy your show. Thank you. JIM: Steve, a couple of reasons why. Back in the 30s, the US and the Fed was constrained by the gold standard. And when Franklin Roosevelt confiscated gold, the reason they did that was the inability to inflate the money supply. Today at the drop of a hat, the Fed can literally create hundreds and hundreds of billions of dollars overnight as they did for example right after the attacks of 9/11, so today there are no restraints. The world was on a gold standard which limited what governments could do. Today there is no limitation. There are no alternative currencies that are backed by gold. And referring to Japan, there were a couple of things that happened in Japan that were somewhat unique, and that is as the government inflated the money supply, the money supply instead of getting invested in domestic goods and services went overseas – and that's one of the reasons why it's driving the Yen carry trade. Another thing is that as assets deflated in Japan, people tended to take their currency and hoard it. So that was another thing that prevented inflation from really taking off. You do not get money velocity. So those are the things that the main reasons that I think you're going to see inflation this time around. And the tendency is if you look at the United States in the 30s, we were a creditor nation as was Japan in the 90s. Today we're a debtor nation. And the outcome for debtor nations is much different than creditor nations. [54:35] Hi. This is Angela from California, and I'm calling regarding the less than reliable numbers from the government. If most of the major players use these numbers, then how can the scenarios that you have using the accurate numbers – what are more than likely the accurate numbers – happen. If the major players are using the government's numbers then how does the economy not become so manipulated with these wrong numbers that I think are intentionally put out? Thanks a lot for your time, guys. JIM: Wall Street is going to go with the standard line – whatever the numbers are, core inflation or CPI. And that's just a lot of these guys were educated along those lines. I've seen a lot of these people on TV. Although I'm not going to mention a couple of individuals, they've told me they've talked to a couple of these guys and when they go on TV and what they say, they don't actually believe half of this stuff. So there are some smart people on Wall Street who maybe turn their head the other way – they know that a lot of this stuff is just fluff stuff, but they are paid to sell. They can't go on the program and say, “hey, we think these numbers are phoney, we think they are made up and we think we have a real inflation problem.” But I think there are a number of people – through their educational background getting educated in Keynesian economics as I was at one time – who tend to think in a certain way. And when you think in a certain way, you analyze things according to the paradigm or the education that you have. It's not until you see there is a disconnect sometimes between what it was you were taught, and what it is that you are seeing in actual reality, that you wake up some time after. I did in 1987 – I go: there's something wrong here, it doesn't make sense and that's how I discovered Austrian economics. But a lot of these people believe this stuff. [56:24] JOHN: One of the reasons I went to look for alternative media was the fact that when I started working, one of my early careers was writing news for CBS-owned full news radio station on the West Coast, and I kept observing that there was always a difference between what the politicians were saying and what ultimately happened. And I kept thinking, well, how does that happen? It's like the words – the verbiage – doesn't match the reality. I began to say, “hey, I bet there's something else going on here that I'm not looking at.” That was my first tip – very much the same as you did. Cindy is in Murphysboro, Tennessee. She said: I listen to the Big Picture most every week and really enjoy the common sense you and John offer. You speak about investing in companies that much a history of paying dividends. How would you suggest the best way to discover who these companies are. JIM: Boy, you can go to, for example, a public library and get a copy of Value Line. Value Line have – I think it's their little weekly supplement that comes out – stocks categorized by the highest dividend paying yield by companies outside of the utility industry; then they’ll have them categorized including the utility industry. And then what you can do is go to the individual stock page of that particular company, look up, and just take a look at the history of their earnings and their dividends, take a look at their pay out ratios. So one of the best sources I think you can find and it's easily available is Value Line. [57:42] Peak Oil: How to Prepare - Why It's Sooner Than You Think JOHN: Well, let us get back to one of our favorite subjects here now as we turn the topic on the Big Picture – that is peak oil. And it was very interesting, Jim, last week we spent a huge amount of time on the show, if you remember talking about this very issue – and lo and behold on Saturday when this radio show appears, the Mexican government makes an announcement, and says the chief oil field – the Cantarell oil field – is down in output by about 20%, which is a trend clearly around the world. And it's amazing that it really didn't create some of the ripples that you would have thought it would be doing. Meanwhile we're awash in other issues on the tube. And the reason I'm bringing this up is last week we did something here on the show and that is we showed how integrally related into our society oil is – not just in transportation which we're using running up and down the freeway so to speak, but also in the manufactured products, the manufacture of food and the actual substance of things you have around you every day. They are manufactured from petroleum products. So just saying, over night we're going to cut this out, is simply not going to happen. And then we look at the same time – we have the announcement that the Cantarell oil field is down by 20%. People are hammering on us: “Why are you talking about this so often? This isn't going to hit us for an another couple of years.” And yet this week, if you watched, with the announcements with the inter-governmental panel on climate change, we are awash in global warming issues. And those really will not come around to smack us in the face for 20 to 30, 50, 75 years (depending on your scenario and how far out you project) even if theoretically you have to turn it around right now. The peak oil thing will arrive much, much earlier and have much more devastating impact on a very short term basis. [1:51] JIM: Well, it's like Matt Simmons was interviewed this week and he said a year from now, or a year and a half from now, global warming is not going to be the topic. The topic is going to be peak oil. And John, Simmons did this when he wrote Twilight in the Desert. And before he wrote Twilight in the Desert, he took a look at the world's largest oil fields, and he said, “okay, nobody had ever done that before.” And most of these fields, the largest one – the king of kings – Ghawar, in Saudi Arabia was discovered in 1948. The world's second largest producing oil field – Cantarell – was discovered in 1976. And it produces about a million, almost two million barrels a day. Burgan in Kuwait, the third largest producing oil well was discovered in 1938. Daqing in China, in 1959, hit a million barrels; and Kirkuk in Iraq was discovered in 1927. And what people don't realize is these giant oil fields – these top 50 oil fields – that produce anywhere from 4 ½ million barrels at Ghawar, to two million barrels at Cantarell: they are all in decline. And the problem is on an annual basis, we're not discovering anything that even comes close to a Ghawar or a Cantarell. Today, a super giant oil field is one that produces 50 to 100,000 barrels of oil a day – that's considered a major oil field today. Where in the past we discovered these oil fields like Ghawar – we’re just not discovering them any more. And one of the issues that just blows me away, and especially when I think about the story this week being global climate change, when the real story should have been what happened at Cantarell last week. That should be alarming because we found out, for example, in 2005, that Burgan (the third largest oil field in the world) had peaked; and we found out that Cantarell (the second largest oil field) had peaked. And initially, the Mexican government said, “Oh, the decline rate would be 5 or 6%.” It's looking more like annually at around 15%. And as we were talking to Roger Blanchard in the second hour, the disturbing thing with many of these big producing oil fields – whether it was the North Slopes or the North Sea, or the major oil fields in Norway – when they go into decline, it's a precipitous decline. And we're simply not finding anything to replace these giants. In fact, even more alarming, the top 16 countries in the world account for 78% of our oil production. And if we take a look at these top countries, the bulk of them have already peaked: Russian oil production has peaked; the United States oil production has peaked; Iran, China, Mexico, Norway, Venezuela, Kuwait, the United Kingdom, Brazil; and Iraq (if we can ever stabilize the country, maybe you would be able to increase that). So what does is it tell you when you have 16 countries that account for almost 78% of the world's oil production, and the majority of them have peaked. The majority of the largest producing giant oil fields in the world have peaked – and nobody is talking about it. And unfortunately, the US is far too dependent on oil and gas. And as we talked about last December when the Council on Foreign Relations looked at energy independence, they said energy independence for the United States is a myth: forget about it, it's not going to happen. And yet you hear politicians running for president saying, oh, if we do this or do ethanol. It's not going to do it. So one of the reasons that we're going to talk about peak oil in this segment is we got quite a few e-mails last week on what can we do, and how can we prepare for it. And one of the things that we feel here on the program is we are headed for an energy crisis. [6:05] JOHN: By the way, when you say “prepare”, we're talking about the little guy preparing each of us individually – not as a country. Right? JIM: Yeah. I'm talking about individuals because we're headed for a crisis. It's unavoidable. There's no way we can dodge this bullet. It's coming. And just as the CFR is talking about rationing it's one of the reasons that we're going to talk about what you can do as an individual. And a lot of people are saying, “Well, Jim, why should I worry about something that happens or may not happen two or three years from now?” It may happen a year from now geopolitically. It could happen two years or three years from now, but what you don't want to do is be building a beach front home on the Gulf coast when the weather people are saying, “Look, we're going to have a tough hurricane season the next two or three years.” And I want to digress for a moment because I want to tell a story that sort of illustrates this. A gentleman that used to work for me back in the late 80s ended up becoming an internet guru believe if or not. He was talking me in 1992 into going on the internet. We actually had a five minute radio program that I did on the internet. I mean it was very advanced – that was before browsers. And I said, you know, this stuff will never go. And so any way, he wanted to pursue that dream. He left working for me. To make a long story short, he ended up becoming a guru giving lectures to major corporations. He was very knowledgeable on the internet and started a software company. His software company got bought out in 1999 by a spin off from IBM. And what he did is he ended up, in order to save on taxes, he moved out of California – smart guy; and he moved to Florida. And he was living on one of the little islands down there by the Keys. And he had come up to see us in the summer of 2004 – I think it was the month of July. And I was talking to him, and I said, “don't you ever worry about hurricanes?” He said no. He said, “we haven't seen anything in our neck of the woods. It's been well over a decade.” I kid you not – the following month Charley came through, and he had to evacuate the island that he was living on – and he ended up making the documentary for PBS on it. So here it was: it was like, “hey, I don't want to worry about this stuff, it's not going to affect me.” The following month, [notwithstanding] the odds of a hurricane not coming through his neck of the woods in a decade, he got hit. And to make a long story short, the following year they sold their place there and they ended up moving back East. And they were crossing the border in August of 2005 as Katrina hit. So a lot of the stuff people say, “well, don' t talk about this, you know, it's two or three years away, don't tell me about it until the last minute.” You know, that's just not the way the world works. [8:56] JOHN: The hard part of it too when you talk about long term weather – if we talk about the decadal oscillations, for example – these are 70-year cycles. That means in the course of one lifetime you only go through one cycle. So if you're living in a part of the world that, say, has 35 years of relatively warm weather, and then 35 years of a lot of storms, then you grow up in the 35 years of good stuff. So you say, “gee, I can't remember when it was this bad,” when you roll into the new ones, and you see something major is happening. When in realty, it's not. You're just going through a periodic change. And that's the kind of thing you're talking about. People always operate on the basis of what they can recall within their living memory. But that's not how the world works. JIM: No. And maybe there's something else that could even stop it which would be a geopolitical crisis. I subscribe to intelligence newsletters, you do, and a lot of stuff I have, I have contacts in the Middle East that I have talked to, they tell me conflict is coming to the Middle East. I would not be surprised to see something happen in the spring of this year. But getting back to the energy issue, the problem is politicians are not honest about the issue. They demagogue the issue. You didn't hear one politician saying, “gosh, those ethanol mandates that we required last year probably added anywhere from 15 to 25 cents to a gallon of gasoline.” Instead they pointed at the oil companies and they demagogued the issue including the media. A second factor: they don't understand the issue. And third: they overreact. And fourthly: I think when we do get into a crisis, we're going to get into rationing. [10:36] JOHN: Boy, that brings back memories of the early 70s. I remember sitting in lines in California to be able to get gas. All right, so if you think this is coming, then what is it that we as individuals can do because it doesn't do know good for us to sit here week after week and say the end of the world is coming, tune in next week and we'll see if it's arrived. You have to give people some help, so that's what we want to do. I'm an individual. You and I have already sort of taken some steps. I think other people are. What can people do? And of course that depends on their circumstances. JIM: Sure. Well, let's start out with what an individual can do. First of all, start conserving by buying an economical car. If you can afford it, you might want to take a look at a hybrid. If you can't, take a look at maybe a subcompact car like a Civic, a Corolla or something that's going to get 30 plus miles a gallon – or a diesel driven vehicle. I'm already ordering, at least for ourselves, I'm ordering a smart car. I'm on a waiting list to get one. That's that little smart car that Mercedes makes. It's enough for two people to sit in the car, it gets over 40 miles a gallon; it has an 8.6 gallon tank. And the reason I'm getting it isn’t the that I can't afford to buy and pay for the price of gasoline. I do think as I have read several reports at high levels that eventually rationing will come to the United States because that's just the way government handles things. They'll do all of the wrong things. And instead of allowing the marketplace to work and solve part of this problem, they will: number one, ignore the problem; and then when the problem arrives then they'll over regulate and over control it. That's the history of government. But start by buying an economical car. And there are a number of issues. I don't know what kind of work you do, what your traveling distance to work is, but take a look at a diesel vehicle, take a look at a hybrid, take a look at a smart car or a sub compact car, and start doing it now before people start scrambling for them. It's hard to get hybrid cars. [12:42] JOHN: Well, Jim, what about change of living location? Now, obviously, if you're in a city – we're almost sounding Y2K over here, it's spooky to be honest with you – but if you're living in a city, then you've got some limited options. If you live out in the country, you know, alternative energies in your home for example and you have it much easier to be able to put in solar because you're not going to have a housing arrangement there where your neighborhood covenant community people are going to scream about that because they are not on the same page you're on at this stage of the game – they haven't felt the pain yet. So those are some things you can do. Anything along those lines. JIM: Well, there's a concept that I think you're going to see come to the forefront here in the next 10 years and this is small locally planned communities around centers of work. That's called: live, work and play. I mean that's what we have done personally. I have organized my life where everything that I need is within five minutes of my home: the grocery store is three minutes away by car, probably less than 10 minutes by walking; my office is 15 minutes by walking or five minutes by car. So try to live closer to where you work, if possible. For example, if you have a long commute, get an economical car now because if we go to rationing, which I think we will, you know, you want to be prepared for it. If they say you can only have 10, 15 gallons a week and that's it, that's your allotment, you'd better make sure you have an economical car. We had Michael Klare, and he talked about the consequences that are coming and one would be, you know, the rationing police. If you have an SUV, you might want to think about (if you insist on having one and you have the money to afford one) Lexus, which has a hybrid SUV; Mercedes is coming out with a diesel SUV – so you're going to get better gas mileage. But think about how you conduct your life, the amount of time you spend commuting. You might add a couple more hours to your day by living closer if possible to where it is that you have to work. And that's one of the issues that we took a look at. I had 22 acres out in the country and I was going to build a self sustaining home, but I was stopped by the environmentalists on wind turbines and things like that. You just can't erect those kind of things here in California without all kinds of difficulties and hoops and it just became difficult. So we've got solar on our home, we've added extra insulation on our home. I have a water filtration system that comes into our house, filters all of the water. But more importantly, John, I can walk to work; I can walk to the grocery store because in a crisis, let's say somebody cuts off oil or the production of oil drops dramatically for whatever reasons (peak oil or political conflicts), the transportation system will be given priority. [15:39] JOHN: Okay, well, since we started down this road, let us look at things like what about stockpiling things. I don't want to use the world hoarding – that’s not really the right word. But obviously I've felt like since Katrina and other areas that people in this country are just woefully under prepared for eventualities, and they turn and look for a government (like they did in New Orleans) that wasn't going to be there to help them. And frankly, really shouldn't be. In other words, that's supposed to be something that you and I do. Everybody has grown so acclimated now compared to say in the 30s when the depression happened, they are so acclimated to just saying, “oh, great government do something.” And frankly, government is always incompetent and will probably not be there in the midst of these. JIM: I tell you, you bring up an example, New Orleans after Katrina and Rita is just the best example of that. But I would start stock piling canned food and water in case of a destruction of services. And I don't need to tell anybody that lives on the East Coast or the Gulf Coast that were hit by the hurricanes, that have been hit by tornadoes, have been hit by storms – they know what I'm talking about. You know, try to go to Home Depot and get batteries; or try to go to the store and get water, or try to get gasoline. It was in short supply. You couldn't get it. And I've told this story before, but last summer, I came home from the beach and I was checking in and I had no idea – I wasn't watching the news – and we had an E. Coli break out in North County, San Diego. And as a result, people rushed to the super markets and cleared out the super markets of all of the bottled water. I hadn't heard that this occurred, and I showed up at the super market and I was going to get my favorite water. And I'm looking at the counter and the entire section of water had been wiped out. Everything – I mean you couldn't even get Perrier. And when I was up talking to the cashier, I said, “what happened.” She says, “you haven't heard about the E. Coli break out?” So here was just a little event in my little neighborhood and the first thing that people do is, “oh my God, water is contaminated,” boom, rush to the store – and the inventory of the store is cleared out. And we saw, for example, in Phoenix, Arizona in 2005 where a pipeline carrying gasoline into the state broke, and all of a sudden there was this shortage of gasoline. My brother-in-law tells me there's only about a seven day supply of gasoline in the entire city of Phoenix. So this is how precarious of a situation we are where you have an unnatural or a natural event happen and then all of a sudden what happens is people panic, they go to the stores and they clear out the stores. And then, you know, you get wind of it and you go try to find something, but it's too late. So we have been stockpiling a little bit of food: every week I buy a couple extra cans. We keep extra water. And medical supplies, things like that, that we keep around the house. The other thing that we have done because the soil is so bad here in Southern California, what we did is we cleared out about – it’s Mary’s garden area – it's about a 40 by 40 area, about 1600 sq. feet, we dug down about five feet and then had a whole area dug out and filled with top soil. So a vegetable garden. And you know, John, people are probably thinking, “oh, my goodness, these guys are talk off the deep end,” but you remember what happened during World War II? JOHN: During World War II, everybody had victory gardens – I remember that one – and people had to hang together. I think what you're talking about here is a prudent rethinking of how we do things. It's all been too available for too long. You know, one of the things I was thinking while you were talking there is everyone needs to have a small amount of potassium iodate on hand to give to your family in case that's a dirty nuke incident. That's a real possibility today, Jim. And some iodine (some kind of an iodine supplement) will saturate your pituitary gland, and keep you from…is it thyroid or pituitary, I can't remember. JIM: I'm not sure, but we have it here and we got that after 9/11. JOHN: It will prevent certain forms of radioactive iodine from saturating various parts of your body tissues and keep you from getting the resulting cancer from that later on. It's very cheap. It can be ordered on-line you just keep it in your medicine cabinet along with the disinfectant, and whatever else you keep up there in your medicine cabinet. It keeps almost forever since it's a chemical rather than a rather unstable type of thing. It's just something everybody should do now given the state of the world. Will it happen? Hopefully not. But what if it does? JIM: Well, what the heck, you have some canned food and with the cost of inflation, you probably have some cheap food laying around the house. But any kind of little event – one that we saw here in, I think it was 2003, the city of San Diego had a major fire. I can remember we were attending a wedding in Phoenix, and we were on our way back – we were driving by car – and we were just outside of Yuma [ph.]. Some friends of ours got a hold of us on a cell phone. They go, “stay at a hotel. You're not going to be able to take Interstate 8 into the state. It's all ablaze in fire.” And that was true. We had to stay in Yuma for three days and John, my brother had called me on the cell phone – he had got out of town – and said: “you would not believe this. I'm driving on I 15 and there's fires on both sides of the road.” In fact, the neighborhood where I had previously lived, the fire had got all of the way up into that area. And well, when we got into town, we literally had to get those medical masks at Home Depot, to drive through interstate 8 because of the smoke inhalation. And John, when I got to my house, the stuff that was in our pool and the sky – the way it looked. You know, here in San Diego, we never think of something like that. So these kind of events can happen. And somewhere down the road, I don't know this year, next year, a couple of years from now, three years from now – I think around 2010 – we hit the peak oil crisis. Matt Simmons – we're going to get him back on the show – and I remember talking to Matt a while back about some of this stuff, you know, storage and things like that, and some people listening to this program, might think it's a little crazy, the people in the peak oil send trying and people that are really close to it that are monitoring this stuff (and I'm talking about at very high levels, I'm talking about high levels of government), they know with about this, John. And that's why they are publishing papers. It's just that this isn't the kind of message you want to tell people. It's just much easier to sit there and say, “you know, what, we're going to tax the oil companies, we're going to get these guys.” It's a much easier palatable sale than telling somebody, “look, you continue what you're doing and we're going to be in trouble, so we're going to have to disrupt your lifestyle.” Sooner or later, that is going to happen any way. [22:33] JOHN: Yes. There are real lessons by the way to be learned from Katrina and that is what would happen in New Orleans: government was not ready, they kept pointing back and forth to each other (state, local, federal). And meanwhile the situation just grew from worse to worse. Nor were the people prepared either. That's important to point out. JIM: No. And all you did was you had government pointing the finger. The Mayor blamed the Governor, the Governor blamed the President, the President blamed them. Politicians blamed the oil companies. I mean nothing was done. Fortune did a great article – about the only people that really helped the area was business. They had the national guard getting supplies at Wal-Mart because they could get the supplies; Home Depot. What some of the oil companies did in the area to help victims were more helpful than the government themselves. Government turned out to be a hindrance to people getting help, and that's the point that we're trying to make here. You've got to take care of yourself. And so these are some of the things that you can do on an individual basis. [23:35] JOHN: And there are other issues too. Joel Scowson has a whole list of safe areas to relocate, because like here the fact that we're a colder climate is not an issue because of the fact we have so much wood all over the place. JIM: You have hydro-electro power in your neck of the woods too, don't you? JOHN: Right. We're hydro-electric. And so we don’t have that issue. JIM: See, here, the one thing I like about Southern California, you can literally go all year round without air-conditioning or heating. It's been cool here lately in the last couple of weeks, yes, you sleep in PJs and you have a warmer blanket and during the summer, you just open up the window and you run your fan – so that's the nice advantage about the temperate climate that we have in southern California. The other thing that I think is really important is, you know, if you live in an area that has severe climate and you do not have reliable sources of power – wind, solar, hydro electric, wood – then I think that area of the country (wherever that may be) is going to have some problems. So you might want to think about where it is that you live and where you get your source of power. [24:39] JOHN: And also think redundancy. And that is always have redundant heat sources – in other worlds, in a heating area where you need to have heat, have two different sources, electric, propane, wood burning versus electric or oil or whatever it happens to be. Just start thinking “what if.” And a good way to do what if is to go to your circuit breaker and turn off all of the circuits and say, “well, we're going to live for 24 hours, what do we need to do?” It opens your eyes real fast. JIM: Yeah. We have candles in the house because we have gone through power outs here in California. And it's happened to us a number of times that it’s middle of the evening and all of a sudden different you've got a power out or in the middle of the day. So we have candles. I mean these are the kind of steps that you can take. And we'll be talking more about this in the programs ahead and in the future, and we'll be bringing the experts in this area an as we address the issue. But these are some simple steps we wanted to address. We got several e-mails and I go, “well, you know, we're talking about this in the Big Picture.” “But what about me the little guy, what can I do?” And hopefully, you'll find this helpful. [25:47] JOHN: And of course, we never fail to bring it back to investing because this is important. I think alternatives and other situations like that are going to become increasingly important. Now is the time to get into it before everyone else discovers it. JIM: Well, the first thing I would do, once again, if you have oil investments sit back and relax, don't worry about the fluctuation – although I would look at oil companies that have the ability to increase their reserves and production, and also oil companies that have those reserves in politically stable areas of the world. Another thing that I think, buy them now while nobody is interested –alternative energy – because mark my words, you've heard me say this on the program over and over again, you will find that day you're going to see it in your life time (and my guess is in the next three to five years) when CNN runs a story on peak oil. You'll see it on the cover of Time Magazine, we've already seen it on the cover of National Geographic – and when that happens, anything that has to do with alternative is going to go up like an internet stock. And right now, the best thing that we can do is get into those areas, bring capital to the markets to those areas so those companies can expand and advance their technologies, so that we are going to find these alternatives that can help us when oil production peaks in the globe. The other thing too that goes along with this is infrastructure. Our infrastructure in this company is in bad decay. And I think, unlike Europe, and the last energy crisis, or emerging China and Asia which is modernizing their infrastructure with what’s going on in energy, you're going to see things like light rail systems having to come back, the rail system, the river barge system which are more efficient means of transporting goods. A lot of this infrastructure is going to have to be rethought, John, when you start having oil prices go over $100, $150 and $200 a barrel. In fact, someone asked Matt Simmons I think the other day and he said in a bad situation, in an extreme crisis, $300 is not out of reach. So these are the things you can do to invest in and these are some of the things that you can do to think practically. But remember, the old saying: it wasn't raining when Noah started building the Ark. JIM: Joining us in other voices this week is Michael Klare. He's a professor of peace and world security studies at Hampshire college. He's written two previous books, one called Resource Wars. His latest book is called Blood and Oil: The Dangers and Consequences of America's Growing Dependence on Imported Petroleum. Professor, I want to get into an article you published recently about an energy-fascism. And let's talk about some of the consequences of that, where you talk about it we don't do something about what we're doing now, or the way we're handling things, fascism maybe in our future. MICHAEL: Sure thing. JIM: Let's talk about some of these things: you talk about either we may be involved in or participate in foreign wars to secure vital energy supplies, such as the conflict in Iraq; or we may be at the mercy of those who control the energy spigot like the customers of the Russian energy juggernaut, Gazprom, in the Ukraine; and also maybe sometime in the future, we might be under constant state surveillance if we consume more than our allotted share of fuel or engage in illicit energy transactions. [29:46] MICHAEL: This is all part of what I see coming down the pike as the world faces decline of the supply of major conventional sources of energy: oil, natural, gas – even uranium is not exactly a plentiful source of energy. All of these basic sources of energy are finite substances. Eventually, they are going to run out and no alternatives are now available on a supply large enough to make up for them. So we could expect scarcity in the future. And all of us on the planet are so dependent on energy that we're all going to be scrambling for whatever is left. And under those circumstances, I fear all kinds of unpleasant consequences: wars, conflict, and as I say in my articles, increasing state control over whatever supplies area available – regimentation, militarization, surveillance, rationing. This is what I hear unless we take steps now to curb our consumption of energy, to use it much more prudently, and to accelerate the development of alternatives. [31:10] JIM: Many of the experts in the oil camp believe that we're going to reach this global peak in oil somewhere between the year 2010 and 2015. Just last weekend, the Mexican government reported that production in the second largest oil field in the world, which is Cantarell, dropped by 500,000 barrels. They were producing two million barrels a day at the beginning of the year; by the end of the year, the production had dropped a million and a half; and they are projecting that this year that it will drop by another 600,000. These are big warning signs when you see the major producers of oil in the world one country after another – Burgan in Kuwait, Ghawar in Saudi Arabia, now Cantarell in Mexico – are peaking. And yet they are being ignored, professor. MICHAEL: Yes. Well, there are two sides to the equation that everybody has to bear in mind. One is the one that you just described. The decline of the existing large fields like Cantarell and Mexico and Ghawar in Saudi Arabia. The giant fields in Texas and Oklahoma and the United States and so on that supply such a large share of today's oil – those are in decline. If those were being replaced by new fields equally large that were coming on line in the years ahead, we wouldn't worry about it; right? But nobody is reporting new discoveries on an equal scale. That's the other side of the equation. The rate of new discovery has been exceedingly disappointing for the past 25 years. There's been only one new discovery in the past 30 years equal to those others: the Kashagan fields in the Caspian Sea, which is just beginning to come on line and has enormous problems which we can discuss if you want to go into detail. But other than that, no new fields have been discovered in 25 years. And if there are no new discoveries to make up for the fields that are in decline, then we know we are in deep trouble. [33:29] JIM: You know, Professor, why do you think it is, if I was in the business, for example, of making or manufacturing automobiles, if I was in the airline business, I would think that something like peak oil and its consequences would be something that I would be paying a lot of attention to. And if I was the US government where I have a 300 ship navy, many of those ships run on diesel fuel, you have an army in the Middle East that drives Humvees that require a lot of fuel – I also would be concerned. I saw the military recently is at least looking at this: they are talking about replacing the Humvee with the lighter made vehicle; and also about making the discover whether to go to an all nuclear Navy. MICHAEL: This comes under the heading of the rise and fault of the great powers, the title of the famous book by Paul Kennedy of Yale University that came out about a decade or so ago. What accounts for the rise and fall of great powers is those that addressed exactly these matters, and those that fail to do so. And we see that today. Just in the past few days, the Ford Motor Company reported the greatest loss in its entire history. I forget the exact amount, but it's like $10 billion last year it lost. And this is because of the fact that it stubbornly refused to take account of the fact that oil is becoming increasingly scarce, and that consumers would respond to that by turning away from Ford’s giant SUVs – gas guzzling SUVs – and turn to smaller more fuel efficient cars, most of which are made by Japanese companies. On the other hand, Toyota and Honda, which looked into the future and said, “Aha, the future is going to entail a demand for smaller more fuel efficient vehicles – that's what we're going to specialize in.” That's why those companies are now overtaking forward and General Motors because they thought about that. This is what accounts for the rise and fall of the powers. And it's the stubbornness and the myopia of American leaders in not realizing the impact of energy insufficiency, and taking and making adequate plans that we're going to pay the consequences of that. [36:05] JIM: Do you think, Professor, one of the reasons we're that way here is at one time, the US was one of the world's largest producers of oil? We produced… MICHAEL: Exactly. Yes. Exactly. Go ahead. JIM: At one time, we produced almost as much as Saudi Arabia. And then secondarily, when our production began to decline it was just easy to buy if from somebody else. But now, we find ourselves in a situation where we have large imports of over 60% (70% when you count refined products). And we're not only competing with other players for that today but many of those areas that we get it from are like Mexico whose fields are going into decline; Canada; then we have Saudi Arabia, we have Nigeria, where you have the rebels who are threatening to take down Nigerian oil production; you look at Venezuela which is right up there and they are threatening to cut us off or at least wean us off oil) – that [should] be a wake up call to our leaders. Instead any time the price spikes up, the only thing they want to do is vilify the oil companies. MICHAEL: Well, I think you have it exactly right. We became accustomed to oil abundance in the days when the United States was the world's leading producer from 1860 on to the 1950s. For almost one hundred years the United States was the leading producer. And even up until 1998 we were producing more than half of our total energy supply. So it was easy to get into the habit of using it lavishly, of not thinking about the consequences, of taking it for granted. This is how you become habituated to something. I think you're absolutely right. We just became accustomed to this and didn't think about the consequences. And then, just as you say, it was easy to buy it when the dollar was supreme, and it seemed cheap. But those days are over and our leaders have failed – Democrats and Republicans – have failed to take the kind of leadership we need and say, “folks, it's time to change our behavior and behave in a more prudent fashion,” and not to squander our wealth on much more costly now imported oil. [38:41] JIM: I would have thought, and this is, you know, when the governments is always looking for ways to stimulate the economy or to create new jobs, about rebuilding the nation's rail system. We know for example, Professor, it's more fuel efficient to put goods on a rail road car from Los Angeles and ship them over to the East Coast or put them on a river barge – and yet everything is based in this country on the automobile. MICHAEL: You're absolutely right. And I know you're speaking to me from San Diego and I've had the good fortune at one point in my life to live in California and to travel frequently between San Francisco Bay Area and Los Angeles and San Diego and to drive or to fly. And I know that if this were Europe, you'd be able to go between those places in three hours or so on high speed railroads that now takes – even flying, with all of the trips to the airport and security and the parking, takes longer than that. It's insane not to have the kind of high speed rail that you have in Europe. We're making a terrible error. We're falling behind the Europeans and the Japanese. And now the Chinese are building high speed rail – and Taiwanese and the South Koreans. We're falling behind in technology. It's a terrible disgrace. [40:02] JIM: That the thing that's surprising and if you look at the rest of the world right now, that is adopting, for example, China is going to nuclear power, you have nuclear power in Europe, other places are going to that, and here we have a company like GE that makes these nuclear reactors. They make the reactors, ship them to other places in the world, but it’s very difficult to build them here. MICHAEL: Well, now, this is what I speak about in my article about energo-fascism. There is the point that in those countries they have centralized governments – France included – where there is less democracy. Now, I'm not in favor of centralizing the power over nuclear energy that would be required. In our country, I think it's right that states and localities – municipalities – still have the right to decide where to locate nuclear reactors. And I want it to stay that way. If a municipality in our State of California decided to go in that direction and people vote for that, that's fine. I don't want us to be like China where the centralized communist government decides let's have nuclear power. So that's one of the issues in my article about fascism – energo-fascism – that I draw that distinction. Because I worry that with nuclear power, because nuclear energy does entail a risk of the proliferation of the nuclear materials for bombs, (the more nuclear reactors you have, the more risk of diversification of nuclear material to terrorists and rogue states, so you need more state control) – that's the trend that I worry about. I mean we can have an honest conversation about it, but I don't want to go in the direction of more state centralized authority. [42:07] JIM: In the second part of your series you talk about energy-haves and have-nots and with it, I think, a major economic and military shift to those that have it. And if you look at your list, very few are going to have this in the future; and those that don't have it are going to be scrambling and at the mercy of those who do have it. MICHAEL: Yes. I think this is the new reality. It's sort of the 21st century equivalent of military power in the 20th Century. In the 20th Century, it was a possession of, you know, tanks and artillery pieces and bomber planes that was the decisive metric of power between the haves and the have-nots. But I think in the 21st century, it's who has domestic sources of energy: oil, coal and natural gas and uranium, hydro-power. And there are very few countries in the world that are self sufficient that way. It's two hands really – it's Russia, it's Canada, it's Nigeria, Saudi Arabia, Kazakhstan, Australia, a few others. And these countries are being pursued, wooed, by all of the countries that are have-nots: the United States, the European countries, Japan, China. And this gives the have countries a lot of power, which some of them are using in ways that are deeply troubling. And as I write in my articles, one of those that is especially worrisome is Russia. Under Vladimir Putin, the Russians have chosen to use their energy power in rather ugly ways to intimidate and coerce their neighbors like Ukraine and Belarus and Georgia and other countries on their periphery. And this is the deeply worrisome trend. [44:19] JIM: Professor, I want to go back to the first book that you wrote which was Resource Wars, but then your follow-up book which was Blood and Oil, where you focus exclusively on oil, I don't see anything other than a crisis coming to the United States because we know for example our production is declining, we're not finding it, and a lot of the stuff that we do have, we don't have access to. But even more importantly, in those areas where we could be going with either a light rail system, for example, why we don't have that from California is beyond me with almost over 10% of the country's population. So it looks to me from the way I look at it when I see those that we import oil from – whether it's Mexico, their production declining, Nigeria with the rebel problem and Venezuela – in other words, our sources of energy are becoming increasingly unstable, but unreliable. I don't see anything other than a crisis before we're going to have to get something to move in this country. And then going back to your first part, if we do have a crisis, do we get a fascist-type government in order to handle it versus taking the steps now and doing it with in our republic? MICHAEL: You know, I think there are many people who think we are in the crisis already. And that of course hinges on the question of whether you view the war in Iraq as being based on oil or not. And there's a healthy debate about that – there should be a healthy debate with that. There's some people among your listeners who may think Iraq has nothing to do with oil, and there may be other listeners who think it has everything to do with oil. I personally believe that you cannot separate the war in Iraq from American's historical drive to control the Persian Gulf and to control its oil. And in my view, this is not a recent phenomenon: it goes back to the Carter doctrine. President Carter in 1980 said that controlling the flow of oil from the Persian Gulf is a vital national security matter, and we have to use force whenever necessary to do that. That's 1980. That was a Democratic president – and Democrats and Republicans alike have supported that view. And I don't think you can separate Iraq from that, and clearly we have a crisis about Iraq today. So I think for many Americans already we're in crisis. And I think we're facing a possible crisis over Iran – another oil country in the Middle East. So for many of us already we're facing a crisis over oil. And I agree with you. It's only going to get worse, not better. So the question is how much more intense, how much more severe, will this crisis become before Americans realize that we must behave in a very different way than we do today. [47:22] JIM: Do you see anything – I mean it's refreshing to see individuals like yourself, and Matt Simmons, and certainly the peak oil camp is getting louder, gaining more prominence – but then you have people like CERA’s report that came out last November that says don't worry, we've got plenty for another couple of decades. And then also you have this silliness, Professor, that takes place in our financial markets every Wednesday and Thursday, we get these inventory reports that are seasonally adjusted and people have the impression that the whole world and the oil markets are centered around whatever inventory levels we have here in the United States. MICHAEL: This is a debate that has something of an ideological edge to it because those who believe that (those who argue that oil is abundant) are those who also don't want us to make the kind of changes that I believe are necessary, but that would involve switching investment into new directions. If you believe that oil is going to be increasingly scarce and that we're facing a crisis are saying that we should put a lot of investment into the development of alternatives – into ethanol, into perhaps hydrogen, into solar and wind power, as you were saying as well into rail transport – and not into building super highways and into giving subsidies to Big Oil. But if you're representing, like CERA, if you're beholden to big oil, you have an incentive to make it seem like there's no problem. So your listeners, you know, should question both sides of the debate, and ask what interest do they represent, what incentives they might have for presenting one side of the side or another. I don't have any subsidies from Big Oil, I just have my salary from the college. And I'm arguing because I believe in the fate of this country, and I worry about my children, and my grandchildren (if I have any) that if we don't take steps now to develop energy alternatives they are going to have a very bleak future. [49:51] JIM: I think that's something that's often lost upon people if they realize how increasingly this country is becoming more (and more so into the future) dependent on very unreliable, unstable regimes or regimes or countries whose production is now going into decline. And Professor, it's not like it's just the United States – the way it was 20 years ago. Now, we have emerging nations such as India and China who are placing demands on the world's resources. So it seems like the sooner that we start working on this…But you know, I guess maybe from a pessimistic point of view, I look at the political spectrum today and Republicans for the most part want to increase supply. I don't have a problem with that, but then at the same time, they ignore what we should be doing with our rail system, alternatives; and on the other hand, you have the other side that has its limitations too. So I don't think there's anybody that I've seen in Washington, or very few, that have a comprehensive grasp of the total energy situation, and have a solution to move the country forward in solving it. MICHAEL: I have to say I largely agree with you. The one thing that I would say is different is that I believe that the American public are just becoming increasingly aware of this. In fact, I think that American public is more aware than most politicians and I think the last election was a bit of a wake up call. So I think politicians are beginning to catch on that they need to move more swiftly in this direction. So I think we'll start to see some progress being made and I'm hopeful about that. It's slow, but I think we're going to see some changes. JIM: I'd love to see that, and love to become more optimistic. Well, Professor, I want to thank you for joining us here on the program. If our listeners would like to find out more what it is you write about, you do publish, and you have written two excellent books that I would like to point out to our listeners. Your first book Resource Wars really tells you about and foretells many of the things that we are now dealing with in our headlines; and your other book – accompanying book – Blood and Oil. I recommend them both. Professor, you've been very kind to give us part of your time. I want to wish you a good evening and thanks once again for joining us on its program. MICHAEL: It's been my pleasure and I enjoyed the conversation. [52:26] JOHN: It is time once again to go back to the Q-line. Once again the Q-line number is 1(800)794-6480, toll-free from the US and Canada. And it does work from the rest of the world. You're listening to the Financial Sense Newshour at www.financialsense.com. Hello, Jim and John, this is Brian from Minnesota. First, let me say thank you for the financial education I derive from your program. I have two questions. Number one, do you think the recent rise in gold prices is being allowed by the central bankers in anticipation of the recently proposed sale of approximately 400 tons of gold by the IMF? Second question, do you have an opinion on the safety of investing in the Central Fund, in light of Ted Butler's constant reiterations of not possessing unallocated precious metals. Thank you. JIM: Let's answer the first question. No, I think the recent IMF sale is trying to keep gold from rising. Any time you see gold break out, then they bring out the old canard and, “hey we're going to sell a bunch of gold.” I think the other question is, if they are going to sell 400 tons of gold, the more relevant question is going to be who is buying it? So that's number one. Number two, no – I have a lot of faith in the Central Fund in Canada. Hi, Jim, this is Steve from Wisconsin. I have a question – I invest a lot in the silver juniors and I'm trying to get a handle on the supply and the demand. On the supply side – I look at the US geological survey report that comes out monthly or yearly– and I just wondered if this is reliable information. Thanks. I really enjoy your show. But I've only been listening for about six months, but I find it spectacular. Thanks. JIM: Boy, I tell you, Steve, two other sources I’d look at is the annual silver report by CPM Group and then the Silver Institute. Those two programs, I think will have a lot better analysis of what's going on with supply and demand. JOHN: Marco writes from Germany and he said: Every week I listen to your show. I have a question on the whole commodity complex. Yesterday there was a guy on CNBC Europe. He's very smart, he compared the commodities with the stock market in the 80s specifically with 1987, so he expects another hit for the oil copper and gold market. What should I do with my energy and gold stocks – hold or sell? JIM: Oh, boy, definitely hold. One of the reasons we have been so persistent on peak oil, I have literally, at this point, read what has to be close to 80 books on peak oil. I've looked at alternatives; I've looked at abiotic oil – I've looked at all of it – and peak oil is not too far off. And if you're a long term investor, and you're thinking longer term, hold on to your oil stocks. They are not overvalued. Where are you going to be able to find stocks that are selling at four or five times cash flow versus where the rest of the market is selling at 16 and 18 times earnings – not to mention cash flow could be even higher than that? So hold onto your oil stocks. And I know there are a lot of commodity-bear bears out there. I think as world currencies continue to depreciate and central bankers continue to run up the supply of money and credit, it's going to begin to dawn on people. And I think you're going to see a movement into hard assets very much in the way that we saw in the 70s. The third factor that I would throw in is on the supply and demand side. We do not have giant stockpiles of all of this stuff. It was difficult to mine the stuff in the last couple of decades during the bear market. You lost money, mines were shut down, the industry consolidated, not a lot of money invested. Today, you've got growing demand from all parts of the world. It's very difficult to go out and discover a new mine, bring it on line and put it into production and even then you even run the risk of it may get confiscated. So a lot of these factors – these supply and demand factors – don't go away overnight and I just don't buy the idea. In any kind of cycle, in a bull market, just as we saw in stocks, that cycle lasted 18 years from 1982 to 2000 – you saw corrections in 84 year, corrections in '87, corrections in '89, corrections in '91, corrections in '94, '97, '98 – but all along the way, it kept going up. And you're going to see the same in commodities. You will see corrections along the way, but I think they've misdiagnosed this whole issue in terms of that being it. [57:26] JOHN: And Derek says, by the way, he knows there are several issues with ethanol, but one of the biggest issues is ethanol's hydrophilic nature (meaning it likes water). After all, beverage grade ethanol which comes off the still at 190 proof – somewhere around there – is blended down with water to get Vodka's 80 proof. This may change the whole nature of tailgate parties, Jim: you run out of booze, you just walk around to the tank, get your siphon hose and you're up and running again. Right? JIM: Believe me, from the stuff I've been reading late at night, I may have to start doing that. You know, Frank and I were just talking about the other day some of the materials that we are reading. I have to stop reading my normal reading fare about 9:00, 9:30 because the stuff I'm reading is so heavy duty today that you just want to – I want to get my favorite bottle of wine, a good cigar, get on my sail boat and sail off into the sunset. But you know, we always think positive, and you've got to bring yourself from around and look at the bigger picture longer term. [58:25] JOHN: If worse come to worse, slap yourself on the face. Right? JOHN: What we would like to do now on the Big Picture is to continue a thread that we began a couple of weeks ago looking at the issue of planning for your retirement, and something that is really big on our radar screen, any way, is looking at the issue of retirement portfolios. So, Jim, the ground is yours. JIM: The industry itself, when I got into the financial planning industry in late 70s, John, you had these standard prescriptions that went into the formula for what a person should have in retirement. And remember, I got into the industry in the late 70s. We were running 14% inflation rates; oil prices were heading towards 40 dollars a barrel; gold over 800; silver at 50. So we were all thinking when we got into the industry, boy, you need inflation hedges. So the predominance of hard assets in the portfolio was the current thinking because that had been the trend for the last 15 or 16 years. So when you're thinking about retirement, there's a tendency – it's kind of like, you remember, John, what was it – is it the Medical Association, they used to come up with the standard, recommended diet. You have so much carbs and milk and all of this stuff, and the trouble is if you followed that diet, you had diabetes or heart disease. [1:00:08] JOHN: Well, we learn as we go. What the heck. JIM: Yes. So there's a tendency to get very standard standardized and say, oh, you're retired, you're 65, this is what your portfolio looks like. I disagree with that. And I've seen it. I think the first important thing that you have to think, and this gets to be Big Picture thinking, is what kind of environment now that I'm retired am I likely to see. Is it a disinflationary cycle as we saw throughout most of the 80s and 90s: inflation rates were coming down, interest rates were coming down, the world was very stable, the financial markets were very stable, and always on an uptick. People that retired in the 80s, and you could go into fixed income investments: Ginnie Maes paying 12, 14%; Treasuries in the 12%; AAA rated muni bonds, over 8 ½, 9%; utilities 14%; dividend yields, bank CDs 12 to 14%. I mean, those were the good old days and we were in that kind of environment, so people gravitated towards that. So the first thing you have to take a look at from a big picture planning point of view, what kind of environment am I likely to see over the next 10 to 15 years in my retirement? Are we likely to see disinflation, deflation or inflation? And that's the first picture you really have to analyze rather than going to somebody and saying, “you're retired, we're going to put 65% in bonds, and 20% in cash, and 15% in blue chip stocks, et cetera.” They have all of these standardized formulas that they use and the problem is it doesn't take into account the kind of environment that you're likely to get into I tell this story so often, but it stands out and it still sticks with me until this day of a gentleman who was a very high powered executive who had retired at the beginning of the 70s and had put $750,000 into a fixed income bond portfolio. He did have some stocks on top of that. I mean this gentleman was well, and he was a millionaire. He was a millionaire when a millionaire meant something. And so he had over one million dollar portfolio, three quarters of it was in fixed income securities. And I think anybody retiring in around, I think he retired in '68, '69 somewhere around then, thinking, “I've got a million bucks, I've got a pension, I have Social Security, I've got it made.” And, you know, think of the cost of living back then and think what a million dollars was worth. It was probably worth closer to what $10 million is today. And when he came into the office, I was apprenticing at that time, that $750,000 bond portfolio had dropped in value to about $400,000. Because when he was buying his bonds, interest rates were in the upper three, and 4% range; and by the time at the end of the seventies we had gone to double digit interest rates. So he had seen a dramatic change in what his lifestyle or what he thought his retirement was going to be. And so that's the first concept I would give to you in planning your retirement. Think of about the investment environment that you're going to face over the next 10 to 15 years. [1:03:44] JOHN: Well, let's do this analogy as far as health care and investing as well. I personally tend to believe in being aggressive about health care issues for me and my family. And what I have discovered through the years is that every doctor is different. And when you’re trying to deal with something then you want to go to several different people to get different input, do some reading on your own. If you go to one doctor he says your cholesterol is too high, here take your pill; and the next doctor says you know, most of this can be dealt with by nutrition, we don't need to go with some artificial chemicals, let's try diet and exercise; a third doctor says don't sweat it all. We’ll just fix it in post. We'll give you a buy pass after your arteries slam shut. JIM: Come back to me after the first heart attack! JOHN: Don't forget to schedule it with my receptionist, you know. And the real thing that I have found with medical is that in reality, everybody has limitations on what they know about a given subject. And best thing you can do is talk to a number of different people and you usually arrive at the right answer. And that I think can be applied to investment planning as well. JIM: Yeah. I think every individual is a little bit different. Your circumstances may be different from your neighbor. You may have a different kind of pension or you may be fortunate enough to have a really nice pension; you may have more assets that you saved; you may have come into an inheritance. You know, everybody is little bit different, so I am always reluctant to say, “okay, here's the prescription, you retire, put 60% into bonds, treasuries or munis depending on your tax%, put 20% into Blue Chips put the rest in cash, boom, that's it.” Or you'll hear people say, “well, put 5% of your portfolio in gold as an inflation hedge.” I hate to tell you if 95% of your assets are not in an inflation hedge, 5% of your assets in gold is not going to take care of the other 95% – that formula doesn't work either. So everyone is a little bit different, John, and I think what you have to do is customize a program that is going to make you feel comfortable. And everybody has their own little comfort level. I can remember in the 80s, when we had to do everything we could to get people to put money in the stock market, because why would you put money in stocks when you could get 10, 12% at the bank or in government bonds. And so what we did with some clients that were somewhat reluctant, we'd have them dollar cost average by saving a little bit each month and going into some stock mutual funds. And that didn't seem to threaten anybody and it was comfortable for some people. I mean, if you're the kind of person that worries because your stock dropped 25 cents a share, you're going to have to do something to either increase your rate of savings, increase your extra source of income to make up for what the effects of inflation are going to have on your retirement. But the point I'm making here is don't sit there, and go do a little research. And they'll give you these asset allocation models that they give to everybody: “oh, you're age 60, you get door number one; or you're 65, you get door number two; or you're 75, you get door number three. Everybody is a little bit different. They are a little bit different in terms of the risks that they can tolerate; they are a little bit different in terms of what their sources of income are, what their health is. I mean, I have a widow that I'm dealing with now, and she has quite a bit of money, and she is just frightened because her husband handled all of her finances and she didn't have to worry. She had a very good life. Her husband made good money when he was working. They sent their kids to college. They had a good life – very comfortable financially. The only trouble is the husband made all of the decisions. Now, she's by herself, and so she's been with me about three years now. We have been easing her into the stock market. We have most of her money in Treasury bills. But over the last three years, little by little, we've been putting her – I've got her into some big oil stocks, got her into a couple of gold stocks in silver stocks – that took a little faith in me. You know, it's turned out well, and today we have something like 30%, 35% of her assets in blue chip equities. They've done well. She's done well in oil; she's done well in the metals, she's done well in the metals, she’s done well in medical stocks, and she's done well in some of the consumer-staple stocks. But I've got her in companies that she feels comfortable with that she can sleep at night with. And then what I've got her doing is I've had her order some bullion because she doesn't really like the idea of gold and silver even though she's done well with it – it scares her a little built. So I've talked her into buying some coins and she can look at it. That's just something that she feels comfortable with. And that's the most important thing I think you need to do when you are retiring: do not stick with these cookie cutter formulas because they don't work. The asset environment changes in that cookie cutter formula may not fit you personally. You may not feel comfortable with it. And it may not even fit your circumstances. So with when somebody says, you know, what's the ideal retirement formula?You know, it's different for everybody – believe it or not. You can't sit there and get 30 people in a room and say, “okay, everybody all gets Plan A.” It doesn't work that way. You modify it to fit you personally, to fit your own risk tolerances personally. And I think that is what people need to do. And then you modify it because your health may change, your income stream may change, maybe you can't work as much, or you get laid off, or you had a part-time job and, you know, you lose that part time job or you just, you know, you don't want to do it any more. Whatever happens, all we know is throughout retirement, things change. The investment environment changes, the political environment changes, your medical environment changes, family things change and you have to adapt and modify that as you go along. So to sum up, John, number one, take a look at the big picture: what's that likely to be, what kind of environment are you likely to face in the next 10 to 15 years. I think that is job number one that you have to assess. And it is the one that's often ignored when you go in, you see an advisor, “oh, you're retired, this is what we're going to do. We're going to give you model number A. We give this to everybody.” And then number two, find a plan that suits you economically, risk wise, tolerance wise, and then you modify it as time goes along. [1:10:57] JOHN: Yeah. There's a certain amount of observation and monitoring that has to happen even when you're in retirement. I know, Jim, you've got the story about the gentleman who retired a millionaire in 1969, thinking that this was going to be good, and wound up putting all of his income in fixed bearing issues, and then discovered lo and behold that inflation at that point began to take off as we went into the 70s. Remember, we finally got to Jimmy Carter with that whole thing. And so what he had was devaluing, he was unable keep things moving around. So understanding the environment and monitoring it – it doesn't mean you can't retire, It just means you have to monitor what's going on. JIM: Absolutely. And then I would say find a plan that fits you personally, but don't go with some cookie cutter approach. It may be that the cookie cutter approach, you may be a person who that profile fits exactly. Well, great, but for the majority of people, you know, we try to get them categorized in this neat little category: “oh, you're retired, okay, this is what you get. You get plan number A.” And plan number a may not fit you. [1:12:05] JOHN: Well, Jim, I will not say the standard line we've run overtime today, since we always run overtime. There is no overtime. We just do it and when we get done, we're done. And now that we're done, what are we doing next week? JIM: Well, coming up next week, Aaron Chaze is going to be joining me on the program. He's written a new book on India. And of course we'll have the panel of experts and we're also thinking of putting together a gold roundtable for the 17th of the month. We were originally going to do Ahead of the Trends with Ike Iossif. Ike has relocated back to Greece and is going to be doing some traveling, so we're probably going to postpone Ahead of the Trends probably for at least the first half of the year, so we're looking at putting together a gold round table. I should have more information about that when we meet again next week. So it is that time again. On behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend. [1:13:07]
© 2007 James J. Puplava, Financial Sense ® Newshour |
