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JOHN: I love the smell of fresh printed money in the morning. It reminds me of inflation. And there is ‘B-52’ Ben carrying out his promise to bomb us with more and more money. By the way, Jim, it's really almost at the point of immoral because it debases everything everybody has worked for; it destroys the value of what it is they've worked for respectively in the area of savings and things like that. It's important we try to put into perspective the financial and economic environment that we are facing today. Plain and simple, we can probably say that we are really living now in the era of the great inflation. We may even out distance what happened in 1929. Going back to our year of predictions made in January, we've now seen them all fall into place: the real estate market would go down leading to a financial crisis, which it did; there would be a slowing economy and there would be a capital market crisis. And now all of these things have played out according to the script. So now we need to put the crystal ball back into place again and look into the future and put forthcoming events into perspective. JIM: Something that I think that makes this a lot more difficult to understand, and that is what is coming and where we are. You need to put this into the context of an extra ordinary inflation cycle, because I think that's what's coming next. Most people, John, I think, understand inflation as rising prices. In other words, they understand it from the perspective of its symptoms – which is rising prices – versus its cause which is the expansion of money. And if you go back throughout history, going back to the days that money was created as a medium of change, once we invented money as a way to conduct commerce, the next consequence of that was inflation. That was the very next thing that came after money as you try to create more of it above what was created through commerce or through productive hard work. Essentially, what you need to understand is inflation is a disease of money. Before there was money, you didn't have inflation, and so that I think is a very important concept. JOHN: All right. Let's look at the next theme which is facing us right now and that is going to be reflation – meaning we are going to go on another curve of inflation. And eventually if we stay on this course it's going to be hyper inflation. JIM: I want to start this out with testimony we had up on Capitol Hill this week on the housing crisis and the credit crisis and we had the whole gang up there. We had Hank Paulson representing the Treasury, and Bernanke and the Fed. We even had the head of HUD there. And the only guy that really set the stage and he didn't get much press exposure on the cable channels but if you watched C-Span, you picked it up. Let's begin with the Ron Paul cut which really set the stage for where we are heading. A lot of concern now has been expressed about the collapsing of this housing bubble. It's a shame that we had not talked about this 10 to 15 years ago when many free market economists predicted it would come and worried about it and wish we could have prevented it. But the irony of all of this now is that everything that caused the financial bubble, the housing bubble, we're resorting to doing the same thing. You can't solve the problem of inflation with inflation. The debasement of the currency, which is a continual process is the reason we get financial problems and financial bubbles – whether it was in the 1920s or the NASDAQ bubble or the housing bubble. We have to deal with the cause. We're dealing and we talk so much about solutions but nobody is talking about the cause. And the cause literally is the excesses of credit created by the Federal Reserve system and we can't deny this. And then we add fuel to the fire by credit allocation. We come in with the CRA, the Community Reinvestment Act, we come in with insurance by FHA. We come in with the GSEs and the line of credit and guaranteed and implied bail outs. And then when the collapse comes, all we have, what do we do, what do we ask for? More regulation, more credit, more debasement of the currency and that's, that to me…we had heard expressions about going over the line and engaging in moral hazard. Well, the morae hazard has been going on for years and here we are now at a point where we're destroying savers and the poor. We literally destroy people by lowering interest rates. People can't save. And who suffers the most? The middle class and poor who's cost of living goes up because we deliberately and purposely devalue the currency. That's all we're resorting to is the depreciation of currency which in itself should be an immoral act. So to me, if we don't look to the cause of these problems, we're going to have another – and patching it together will do nothing more than what we did in the Depression when we patched things together. We just delay the recovery. [5:43] JOHN: So basically what we see here is a phenomenon like right now, we have a collapsing real estate and credit bubble which was created by inflating the money supply. And now that this is collapsing and it's causing a lot of pain, they propose settling this problem by reinflating the system, which has just got to lead to another bubble somewhere. The money is going to run somewhere. JIM: You know it’s absolutely amazing. We started this discussion with an idea of what really causes inflation and Ron Paul was the only guy that got at the cause. You know, you guys can talk about all of the symptoms as what causes inflation – rising prices, higher oil prices – but the root cause of all of this is the money printing. The printing press. As we discussed last week, John, part of the problem is in our economic thinking in this country which has changed, as we alluded to last week. We no longer have free functioning capital markets. And that really ended when we went off the gold-backing of our currency. And so what we really have now is a central bank planned economy. When something happens like a hedge fund getting in trouble we print more money and lower interest rates. A bank gets in trouble, we print money and lower interest rates. Foreign lenders get in trouble, like Asia or Mexico in 94 year, we print more money. A hedge fund like Long Term Capital Management gets in trouble, print more money. A savings and loan or a bunch of saving and loans get in trouble, print more money. Now you have hedge funds in trouble. You've got the credit crisis working its way up the food chain. What's the solution? Print more money. [7:34] JOHN: So how does this relate to the latest Fed move – in other words, where are they taking us in this whole thing? JIM: Let's begin with what has happened. The Fed inflated the US economy following the bursting of the tech bubble. Then we got the 2001 recession and the attack of 9/11. By inflating the economy, lowering the interest rates – the federal funds rate – from 6% to 1%, this went to the lowest interest rates that we've seen in half a century. And as a consequence concomitant with that, this led to the next bubble. In other words, what they did is they inflated another asset class so we got the housing bubble; as the housing bubble began to weaken, we got the private equity bubble. Whether you're talking about the housing bubble or the private equity bubble it was made possible by cheap money. However, during this process things are starting to catch up. We're entering that end game because it led to rising inflation. So what did the Fed do when the economy heats up as a consequence of all of this cheap money and credit sloshing around the economy and the globe? They begin another monetary tightening cycle. The only difference this time is they were raising interest rates but they never really reined in credit. The supply of money credit expanded throughout the entire two-year period that the Fed was raising. And what is also important to understand is when the Fed goes through these tightening cycles or raising interest rates, every Fed tightening cycle has produced or led to financial and economic crises. You know one of the things we have here on the program: The Fed will keep raising interest rates until something breaks either in the economy or the market and sometimes we get both. And that is what we have now. So then what they do – as Ron Paul was talking about – they come back with a solution to the crisis which is to fight the inflation, which was why they were tightening interest rates with a new inflation cycle, which is where we are now and that's where we're heading. [9:44] JOHN: All right. Then how will this unfold? Because in theory dropping interest rate dollars will revive the economy because they lower borrowing costs and cause the exchange rate to decline. But the key is that if we fall into a recession, it takes a bigger stimulus and a much longer period of time and a larger series of rate cuts before things begin to reverse. It almost reminds you of a drug habit, Jim, you know that? It takes more and more each time to get the same effect that you got at beginning. And this time there is more at stake because we have more leverage in the system. And you have a deflating real estate market, the real estate deflation is much more serious because it impacts the financial system directly through the banking system. So as we slide down this thing, what are the chances of a recession or a collapse? JIM: John, if it is a recession, it's going to be a mild one very much like 2001. But, you know, they are moving aggressively here. So there is a good chance that we can avoid it – at least officially. There are many people, and I'll include myself, that if you take the real rate of inflation and subtract it for the nominal GDP numbers that we report, we're already in a recession. So the Fed, to me, is on a verge of a series of aggressive rate cuts, but they've always got to come across as, “hey, we're concerned about inflation” – the Fed as hard-line inflation fighter when they are actually an inflation creator. You already have the dollar falling to new record lows, we're almost at parity with the Canadian dollar. They surprised the markets twice, both in September and August. That tells me they are deliberately moving to prop up asset prices – especially stocks. And also by doing this, they are keeping the short sellers off balance with these surprises and indicates, at least to me, they are back to targeting asset reinflation. [11:47] JOHN: And what would their objectives be in this? JIM: Well, you know, if you take a look at what they are trying to do, they are going to try to reinflate assets to keep them from dropping, because remember, these assets are the collateral that stands behind this money and credit. So by dropping rates, it's a necessary step to protect parts of the economy right now that are not broken. They'll lower interest rates and as a result, the dollar will go lower. That's going to make it easier for companies to make adjustments. It eventually will help stabilize real estate. I've always said we're going to have problems. But this isn't the big one. It's not going to be 1929 all over as some people are suggesting. But if they can stabilize the real estate market, help consumer spending or at least maintain it, they can restimulate the economy’s ability to overcome contraction pressures. But the consequence is just like if you you go on a drinking binge. And all of this is going to come at a cost – and that cost is going to be higher rates of inflation and what we're going to see are more malinvestments in the economy. I don't know what it will be this time whether, you know, it's private equity or something else and you're going to see another asset bubble. That’s because I would think that one of the asset bubbles coming forward is going to be the stock market. They are going to reinflate the market and that's reinforced by these surprise cuts that came out of the blue when they were talking tough and then all of a sudden, wham, they surprised the markets and in the process forced all of these short sellers. Most of the guys I talked to in the industry, a lot of the guys in the hedge fund business, these guys are just wary. They've just been beaten up trying to go on the short side. [13:35] JOHN: Well, why do they keep repeating these mistakes? Although, I'm not so sure they are mistakes. I think they know what they are doing at this stage. JIM: Well, you're correct. They are making mistakes but you've got to understand philosophically where they are coming from. And we’ll get to this later on in the interview, but they don't believe creating money and credit is the true cause of inflation. They'll attribute inflation to higher oil prices, to rising wages, to businesses raising prices or some external event. In other words, there is a lot of blame shifting which we'll get into later on as we discuss the consequences of all of this action. But the Fed's job is to protect the banking system. A lot of people say they are there to protect the economy, they are there to protect the consumer, the average American. No, that's not it. The Fed’s job is to protect the banking system so that when you have banks or financial institutions in distress such as we have today, the Fed is going to do whatever it takes to reflate the asset prices. And the reason is simple. If the banking system's balance sheet is compromised or damaged by a large amount of bad debt, the only option to restore confidence – and we heard about the bank run in England where people were lining up around the bank to pull their money out. So what they want to do is they want to restore confidence; this in essence is a confidence game. And the way to do that is to see a rise in the market value of assets and people go, “phew! okay. It's stabilized, my house is okay, the stock market is going up.” Or in the early part of this decade when we have stocks going down, we had housing rising and people could shrug off the losses in the stock market because then say, “look what's happening to the value of my home.” So their chief way of restoring confidence is to reinflate the value of these assets – especially those held as collateral by the banks. And what Fed in essence is trying to do is inflate the assets that are the collateral for the loans. [15:41] JOHN: It seems like ultimately, they’re going to balance it on the back of Joe Consumer out here. That's where it all comes down to. You either protect the consumer or protect the banks here. But anyway, let's go back to the problem that Ron Paul mentioned. He was describing the problem as curing inflation with another round of inflation. And basically, you have to stop that if you're going to stop this whole situation. JIM: Yeah. But remember as we talked about last week, there is no tolerance for economic pain in this country today. And we've got all of these kind of economic theories that say well, when you have these problems, just create more regulation, more stimulus, more fiscal spending – all of these kind of things that we do to try to dig our way out of the mess as Ron Paul talks about. All you're doing is postponing the day of reckoning and we've been able to do that. The economic cycle has been stretched out. If you look at it, instead of every four or five years you have a boom and a bust and then you would go through these recessions, now we've been able to extend them for almost a decade at a time. We had a series of recessions going back three decades in 1981; we had a recession and it was a full decade until 1991 where we had another recession; and then from 1991, we inflated our way out of that and didn't have another recession until 2001. And we'll probably get by, John, in that window period of reinflating, and this will end up turning out what many economists call a mid-cycle slow down. And we'll be able to push back the clouds one more time and push back the day of reckoning. I don't think we’ll see the real big one until probably 2010, 2011. But what I want to do to put this into perspective, let's go and start with their solution. The first part of their solution involves monetary stimulus. We've seen that in August when they cut the discount rate by 50 basis points. We just saw it again when they cut the discount rate by 50 basis points and the federal funds rate. This is going to lead to a lower dollar. We're now in the process of seeing that and that's going to be followed up with fiscal stimulus. And boy do we see plenty of examples on this on Capitol Hill this week: with Paulson from treasury, Bernanke from the Fed and Alphonso Jackson from HUD. And John, let's go with the cut from that hearing with the explanation of why it was a 50 basis point cut versus 25 basis points. CONGRESSMAN: Mr. Bernanke, I wanted to get some sense from you. I was surprised at the 50% Fed rate change. I had anticipated 25%. I had not anticipated you would go to a full one point on the open door – or the open window area. Anyway, was that done just for the purpose of getting rid of this problem very quickly; or is there something more serious out there that we're not even aware of, and so many people who thought it was only going to be 25 basis points you should be more aware of? I'm not -- I don't want to plant it if you see one way or another. I'd sort of like your comment on that. What can we anticipate? This is not an over reaction, was this just a firm statement on the part of yourself and the Fed that you're going to take very strong action if there is any chance of a recession or in the disruption of the markets. BERNANKE: Congressman, as we said in our statement over the month of August, the financial market turmoil has effectively tightened credit conditions. That has the risk of making the housing correction more severe and it may have other effects on the economy. So we took that action to try to get out ahead of the situation and try to forestall potential effects of tighter conditions on the broader economy. Ultimately, our objective is to try to meet the Congress's dual mandate of maximum sustainable employment and price stability and we took that action with that intention. There is quite a bit of uncertainty, so we're going to have to continue to monitor how the financial markets evolve, how their effects on the economy evolve and try to keep reassessing our outlook and adjusting policy in order to try to meet that dual mandate. [19:51] JIM: The congressman said, “gosh, is this because we could be in danger of a recession.” In other words, the cleansing process that comes in after a boom, which is the bust, where you cleanse out the malinvestments and you allow the system to reheal itself, we've gotten to the point where, “no, we can't have any economic pain.” And for most of those guys sitting up in their chairs in Congress, they don't want to see any pain because an election is coming up next year. All members of the house will be up for election, the presidency will be up for reelection and then one third of the Senate. But let's go back to that second clip where ‘B-52’ Ben explains further the justification for the cut: BERNANKE: In recent weeks, as Committee members are well aware, disruptions of financial markets have increased uncertainty surrounding the economic outlook. In August, the Federal Reserve took several steps to address unusual strains in the money markets and to improve the availability of back-stopped term financing for banks through the discount window. To help forestall some of the adverse effects in the broader economy that might arise from the disruptions in the financial market dollars and to promote moderate growth overtime, the Federal Open Market Committee this week lowered its target for the federal funds rate by 50 basis points. [20:59] JOHN: Yeah. But once again, Jim, here, by reinflating there are going to be consequences and they never address that. As you said, Ron Paul is the only one whoever points out that this is a roller-coaster cycle that just reinforces itself. JIM: Yeah. It's amazing that everybody on Wall Street and Washington sees the Fed as the doctor. In other words, we've got a problem, cure it. Instead of looking at them as a doctor, an economic doctor that ought to look at the Fed as a drug dealer. It changes one’s perspective I think. [21:33] JOHN: Yes. If the user has to be taken off of this constant cycle, but there is that pain again that you're always talking about; right? JIM: Sure. And you know, John, when the Fed takes this action there is always a consequence. When they cut interest rates aggressively, beginning in 2001, what did we see next? Gold took off, commodity prices took off and we saw the dollar lose nearly 30% of its value. And what are we seeing now? The first consequence is a weaker dollar because the Fed may be able to affect short term interest rates but they can't control the currency, so the first casualty from rate cuts was a fall in the value of the dollar. And people are now picking up, you know, “is a lower dollar good for the economy?” No. It's going to reduce our purchasing power and especially a country that is so dependent on energy that we import 70% of our energy needs. I mean walk into a department store, electronic store, Best Buy, where is everything made? It's not made here. So that means the cost of goods we import in this country are going to go up. I want to go to that clip from cable about the fall of the dollar and the spin that a falling dollar is good for the United States. The US dollar really getting hit – fresh all time losses against the Euro, falling to parity with the Canadian dollar for the first time since 1976. It's going to cost you just as much to go to Canada as it is to stay the US. Now, while this development bodes well for US exports, some might say it also raises a lot of concerns out there about inflation. Is the weak dollar good for America's economy? That's the question we want to ask. We're going to go to John Silvia, Chief Economist with Wachovia corporation. And John, starting with you, bottom line here, a lot of concerns about this dollar. It keeps falling. A lot of concerns that this might lead to inflation. What do you think? Is this actually good or bad for the economy? SILVIA: I think a slightly weaker dollar is good for the US economy. Yes. You do get some increase in inflation. I would estimate given the dollar's decline so far probably an increase in the CPI of maybe 0.2%. JIM: So here we have, John, Wall Street's view on this is that there is almost a free lunch. They can do all of this and there is very little side effect. [23:51] JOHN: So now we have really a big shot of adrenaline here, a major monetary stimulus taking place, but what about fiscal stimulus. JIM: Boy, did we get a good dose of that. I want to play this week's Paulson’s clip where he's explaining why we need more regulation and almost a plea and a kind of go ahead for a fiscal bail out by GSEs. And let's start with his explanation and then we'll follow that with his clip on the need for immediate fiscal stimulus and a bail out. PAULSON: We've had great innovations in the capital markets. This has helped our society – helped homeowners. The history is innovation moves ahead of regulation or policy. So when we go through a period like this, we need to readjust and say what things should we do differently. Where do we need some additional regulation. Where do we need some additional policy measures? But we need to get the balance right and not go too far. [24:52] JIM: What’s absolutely amazing there where he's talking about government creates the problem and then there is a cry for more government to solve it; and in the process, you get more inflation, more regulation, a greater increase in the power of government over the economy. And, John, the system just goes from bad to worse. But as long as we have some asset inflation in the process, people feel that they are better off when actually when they go to the store, they are seeing the full impact of that: rising costs for almost everything that they need to live on a daily basis. Let's go to that second clip now where he talks about perhaps altering the mandate for government sponsored entities like Fannie and Freddie. You know, a couple of years ago, they were trying to rein them in and now they want to cut them lose again. Let's go to that clip. [25:44] JOHN: We might add here this was after congressman Ron Paul had pointed out that we don't need more of this regulation. That's not the problem. And here's what ultimately Paulson said. The mortgages facing the greatest stress today are those with the weaker underwriting standards where borrowers have imperfect credit and little equity in their homes. Legislation should be required to allow the GSEs to purchase mortgages that are above 80% loan-to-value and have no credit enhancement. This would require that the GSEs take on significant credit risk beyond their traditional experience. Legislation that encourages them to take on more risk must also create an appropriate regulator to exercise necessary oversight. JIM: The thing about all of this, John, is with this being a presidential election cycle, Congress, and the president himself trying to protect his own party are going to be in the mood for handouts. So we're going to see a lot of cookies and candies that all of these candidates are going to be offering to the voters. And especially with the deficit figures that will be coming out next month, which I anticipate that they are going to be lower than originally forecast, but all of that is a chimera. [27:06] JOHN: Yeah. But if it's Oreos and Chips Ahoy, boy, I'll look forward to those handouts! But, Jim, you know that with the deficit being really larger than officially reported, so that's sort of a spanner in the works so to speak. JIM: Well, the deficit figures are expected to come in somewhere around the neighborhood of 158 billion to 160 billion. But here's the games that they play. Those deficit figures are not doing to include the money that they take out of the Social Security trust fund. They spend that money and issue IOUs; and that figure is somewhere in the neighborhood between 80 and $100 billion. So basically they are taking future money that should be set aside for future generations’ retirement benefits. They are taking the money, they are spending it. So there is about 100 billion. So add that 100 billion to the 160 billion deficit, now we are at 260. And then it gets worse, because it also does not include – remember, Congress has borrowed over two trillion dollars from the social security trust fund which they are supposed to be paying interest. But guess what, John JOHN: Let me guess here, they are issuing IOUs on the interest; right? JIM: You got it. Not only did they take the surplus funds and issue IOUs, but the money they are required to pay into the system interest on the debt that they borrowed, they issue IOUs for that. So the debt that the government actually owes future retirees keeps getting bigger and bigger. So overall the true rate of the budget deficit is somewhere in the neighborhood of over 400 billion. But with accounting gimmickry, it's going to be 160 billion. [28:48] JOHN: You know the amazing thing about all of this, especially if you walk down the street and begin talking to people, most people don't understand how this is really going to impact their lives, this higher inflation. Most just don't understand the mechanism. You know, they go to work, they do their jobs etc. There are no free lunches. They are going to be asked to pay for these so-called free lunches. But the Fed is held in such high regard when in reality it's an engine of inflation. It's really a machine that just generates inflation and has been doing ever since the first day they opened the doors of it back in 1913. And the Wall Street crowd lambastes gold, but we didn't have these boom-bust problems when we were on a gold standard. We were held solid. JIM: In fact, in an interview – Greenspan has been on a book tour doing a lot of interviews promoting his book. Greenspan who studied under Ayn Rand knew the soundness of a gold standard. And recently, he admitted that to some extent in a recent interview promoting his book that when you had a gold standard, you didn't really need a central bank. But then he turned around and talked about the good aspects of the gold standard; but then he quickly moved over to defend that in a modern society a central bank is really more appropriate. Let's go to that clip that he did with John Stewart this week. GREENSPAN: You didn't need a central bank when we were on the gold standard which was back in the 19th century, and all of these automatic things occurred because people would buy and sell gold and the markets would do what Fed does now. But, most everybody in the world by the 1930s decided that the gold standard was strangling the economy; and universally this gold standard was abandoned. But! You need somebody to determine or some mechanism of how much money is out there because remember, the amount of money relates to the amount of inflation in an economy. STEWART: I forget that? Or you? I’m sure I know that. GREENSPAN: I just couldn’t be sure. STEWART: No. I live by it. GREENSPAN: In any event, the more money you have relative to the amount of goods, the more inflation you have and that's not good, so – STEWART: So we're not a free market then? There is a benevolent hand that touches us. GREENSPAN: Absolutely, you're quite correct to the extent there is a central bank governing the amount of money in the system that is not a free market. And most people call it regulation. [31:17] JOHN: You know it's interesting that was a rather candid admission too. It's not a free market. No it isn't – even though we've been telling everybody else it is. JIM: It's amazing that today people believe we operate under a free market in a capitalistic system. But really, in effect, if we had free markets you wouldn't have a Federal Reserve. You wouldn't have bail outs of individuals or institutions – whether it's a hedge fund or a bank or a foreign government that borrowed money from the US bank. And so what you have now essentially is a central bank system. In essence, we're sort of have a half free system where you see – as he talked about, he called it “regulation” – you have regulation, intervention and governments and central bankers interfere with a free market process in an attempt to alter free market outcomes. Now, he said that basically, he said that the gold standard was strangling the economic system so everybody threw the gold standard out the window. No. What came into play in the Great Depression was the idea – the Keynesian thought – you could interfere with the system and fix it. And instead of fixing it, as we all saw, we turned what might have been just a market correction in the recession into a great depression and the greatest bear market in history. And as everybody knows it took World War II and massive fiscal stimulus to get us out of the Depression. None of the things they – abandoning the gold system, the only reason they did that and confiscated the people's gold was they wanted to inflate the system and it didn't really work. It postponed it. [32:59] JOHN: Well, the political issue here is the fact that what they don't want to do is they don't want to allow the system to cleanse itself. Pain is absolutely anathema to the public and to the politicians who are hoping to get reelected. So the only thing here is to punch in more fiscal stimulus and in so doing we're going to do through this whole thing once again. This is a concept which by the way, Jim Rogers was on Bloomberg interview recently from China as a matter of fact. He really understands this concept and he expressed very eloquently, Jim, and quite forcefully! So let's listen to that. We already have too much liquidity in this system. Bernanke's been printing money at a rapid rate. Beginning of the last month he’s injected gigantic amounts of money into the system. This is causing huge amounts of growth in the money supply. It's causing more inflation, it's causing more weakness in the dollar which is going to cause more inflation. This temporary Band-aid’s putting...saving a few hedge funds or even a few sub prime mortgage lenders is not going to solve our problems. Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. They should be raising interest rates. They should be tightening the money supply. They should be doing something to ensure a sound currency and a sound economy again; instead of every time there is a problem racing through the rescue. Let some people go bankrupt. That is what capitalism is. Bloomberg is supposed to be a great capitalist network. Well, in capitalism, some people fail. If you don't let people fail, it's not capitalism anymore. [34:25] JOHN: I think when you're putting your course together on No Congressman Left Behind, you need to cover this part. It's amazing that none in government understands this, although I really think a number of people do. They just can't fess up to it publicly because it is the system out there so to speak which is why we have inflation. In fact, I'm discouraged whenever I tape these hearings because if you know what's going on and you hear what's being said, you really see how economically illiterate a good part of our senators and Congress people are. This is distressing because this is the core of what everything rotates on. JIM: Yeah. It's almost a scary thought, John, when you see the questions they ask. It's obvious they don't understand economics. And it's one of the reasons why, I think the Fed can bamboozle them because once again, they see the Fed is a drug pusher basically, “hey, look, give us some more goodies or drugs or stimulus so we can make things – we can all get re-elected.” You know, it was amazing in an interview, I think, last week and I used to love these – you know, that's one thing about Bernanke. He can't bamboozle them the same way that Greenspan did. And there was a question that was asked of Greenspan. Basically, when they asked you these questions which didn't appear to be bright ones, how did you handle them? You end up with when say a congressman asks you a question and you don't want to say no comment or I won't answer something like that, so I proceed with four or five sentences which get increasingly obscure. The congressman thinks I answered the question and goes on to the next one. [35:59] JOHN: He's basically saying the congressman is stupid. He really is. I mean when you really think about the implications of it. I guess that's why with technology today, we can see these things actually improper because thanks to the Bernanke babble dictionary or the Bernanke online real time interpreter that we produce here occasionally, you are able to actually understand what he's saying. [36:21] FSN Humor: Bernanke Babble Dictionary Ben Bernanke: The goal as you know was to help ensure… Yada, Yada, Yada. Blah, blah, blah. There he goes again. Do you have trouble understanding Federal Reserve Chairman Ben Bernanke. Well, we don't blame you. We do too. That's why we created the revolutionary Bernanke on-line real time interpreter. Let's hear that again, but with the help of the Bernanke on-line real time interpreter. BEN BERNANKE: The clear communication of policy provided notable benefits. Just push the button and voila. TRANSLATION: We’ve gotten away with raising interest rates. Isn't that great? Nothing escapes the Bernanke on-line real time interpreter during one of the Fed Chairman’s famous speeches. BEN BERNANKE: Policy moved gradually: tightening in one quarter point increments over 14 successive meetings. TRANSLATION: If we move slowly enough, you guys are too stupid to notice. The Bernanke on-line real time interpreter is affordable by everyone in the family. It's only 49.95; payable in anything except dollars. And if you act in the next 10 minutes, we'll throw in the Bernanke o- line real time fib finder. When the Fed chairman is playing fast and loose with the goose. BEN BERNANKE: Although macroeconomic forecasting is obviously fraught with hazards… [squawk, squawk] Liar, liar, liar. Well, there you have it, pick up your Bernanke on-line real time interpreter at any Federal Reserve bank branch. And remember, as the on line interpreter would say: “my job as Fed chairman is to keep economists fooled.” JIM: John, I want to go back to another clip to, unfortunately, one of the few guys that gets it. And that's Congressman Ron Paul as he explains to Bernanke how Fed policy harms most Americans. That’s because, as we've been talking about, there is no free lunch. You can't create money out of thin air, crank the printing presses and feel this isn't going to impact you through inflation because that's the invisible tax. Let's go to that second Ron Paul cut, if you would: RON PAUL: Because we’ve had this malinvestment, all of this credit going into the system and we have all of this correction that needs to come about, and we think we're going to solve the problem with inflation with more inflation. But really, the bottom line is what moral justification do we have to deliberately devalue the currency and the dollars that people save? This forces the cost of living up for the people who don't even have a chance to buy a house. So there is a moral consequence of the system that we have today. And I can't see how we can avoid this moral obligation we have. The responsibility of the Congress should be to maintain the value of the currency, not deliberately tax the people by creating new money and passing on the high cost of living to the people who can least afford it. Wall Street never suffers from that, and we still know of all of these things out in the open that the Federal Reserve does, but we don't know the details of what the Working Group On Financial Markets do to prop up markets because I'm sure they are very busy; and have been very busy in these last several months. But is there any moral justification for deliberately devaluing the currency? BERNANKE: Thank you, Congressman. The value of the currency can also be expressed in what it can buy of domestic goods. That is the domestic inflation rate. That is part of the Federal Reserve’s mandate which is to maintain price stability which to my mind means the value of the dollar. The inflation rate is something we pay close attention to, we continue to pay close attention to – JIM: Stop the tape. Protect the value – Ben, somebody need to send Ben a chart of the dollar. You know, this is gobbledygook. Oh, anyway. [40:01] JOHN: I did like the part where, you know, Ron Paul is going boom, boom, boom and Bernanke says: thank you, Congressman. JIM: Thank you, Congressman, for letting everybody know what we really do. JOHN: Oh, but you know what? Ron Paul has it right. There is a moral hazard here. The moral hazard is that causing inflation devalues the dollars that you and I have saved by sweat and blood and a lot of hard work. So in order to keep those dollars par we have to work some more just to make back what we’ve lost. And it's an ongoing process. You have to run faster and as the inflation rate goes higher and higher you have to run faster, and faster and faster and the burden really falls on the working class. And so you really do wind up with two classes, don't you? You wind up with the Wall Street set that's saying everything is peachie keen, I'm making lots of money; and then you end up with the laboring set out in fly-over land, and they are saying, “I'm almost out of breath. I can't keep this up anymore.” Well anyway, so much for a diatribe on my part. We've talked about how the system works. Let's move on to where this is really, truly leading us. JIM: You know, I want to start this discussion, John, in reading from a quote that our listeners will become familiar with. I put it in a series of articles that I wrote called The Great Inflation and it's from the Jens O. Parsson’s book called Dying Of Money, which is what we're calling this segment because that's exactly what's happening: our money is dying, it's losing the value as we've seen the dollar fall against most major currencies. But here is the tonic, here is the catch. It's like any drug pusher. When you first start to inflate, there are the good parts of inflation. It's only what happens afterwards when it catches up with you – the hangover that comes in that people become concerned. But Parsson’s expressed this eloquently. It's one of my favorite quotes from his book called Dying Of Money: Lessons of the Great German and American Inflation. It goes like this: Everyone loves an early inflation. The effects at the beginning of the inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets and a spectacular general prosperity all in the midst of temporary stable prices. Everyone benefits and no one pays. See there is that concept, John, of a free lunch. That is the early part of the cycle. In the latter inflation on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. And in the terminal inflation stage, there is faltering prosperity... what we're seeing now. ...tightness of money, falling stock prices, rising taxes, still larger government deficits and still roaring money creation. Now, accompanied by soaring prices and the ineffectiveness of all traditional remedies. Everyone pays and no one benefits and that is the full cycle of every inflation. And so we're ready to start another cycle. The only thing is people are all noticing it, John, whether they are going to the grocery store, the gas station, paying their utility bills, seeing their doctor, seeing their insurance, paying for education, going to the store. They are starting to see the full effects. And then this inflation cycle we're starting at a much higher rate of inflation than in previous cycles. And you can see that visibly today through the symptoms of inflation, rising prices with rising energy prices – oil over 80, gold prices are heading their way towards 800, copper prices close to $4, wheat prices at 9, corn at close to 4. So we're going to start seeing in this cycle some of the pain. And the only way that it hasn't been more painful is we've been able to spread our inflation to the rest of the world. [44:02] JOHN: Yeah. And as long as most people don't understand what causes inflation – we talk about off loading of blame, it's easy to blame shift right here, and let's face it. If you were the average person tuning in to listen to this conversation, you'd get lost in the bubble. They only know that there are rising wages, falling dollar, losing jobs, higher oil costs and they listen to the brrrrr – and it doesn't communicate anything to them. Let's face it. JIM: No. You know, like all great inflations, those that cause it don't understand the consequences of their own actions. And John, that's one of the principal reasons we have it today. You know, they make reference to it. Greenspan did about expanding supply of money, causes, higher rates of inflation. Then they make reference to it. If you listen to the guys on Wall Street and even to Fed governors, they see no direct correlation between the rise and value of money that's being created – the M3 figures are growing at 14% and will probably be closer to 17, 18% by the end of the year. And you can trace almost the pronouncements coming out of these guys. They'll pay homage to it and they acknowledge it, but by the same token, they are doing away with M3 because it wasn't worth the cost. You're talking about an organization that can print money. But it's very reminiscent of the head of the head of the Reichsbank in the German inflation. We ought to talk about that. JOHN: Well, the head of the Reichsbank at the time was Karl Helfferich. He was probably the one gentleman most responsible for the German inflation and best really summarized the government's professions of helplessness before the wage price spiral even while freely admitting that stopping the money creation would automatically have stopped the inflation. So his explanation here coming down through almost 70 years of time here still rings very familiar to anyone who has ever listened to any government representative or person from the Fed trying to explain away inflation. Here is a quote. The claims were put forward and effectively pressed to raise the standard of comfort and at the same time to reduce the intensity of labor. There could have been but one result, a race between wages and prices such as we have witnessed in the last few years. The social and political position of labor was sufficiently strong to enforce higher wages, notwithstanding the fact that less work was done. As the profits of capital had shrunk to a minimum, the higher wages could be paid only if higher prices were obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices. There is that psych the we kept talking about. And what was the part played by money in this vicious circle. The race between wages and prices gave rise to a corresponding increase in the demand for money, both on the part of the people and on that of the financial administration of the state. A monetary organization which offered resistance to such an expansion of monetary demand would thereby have put a stop to the race between prices and wages. The acute shortage of money would have brought about a collapse of wages and prices probably accompanied by crises and catastrophes. The German monetary system however makes possible in practice an unlimited expansion of the circulation and it offered no such resistance. The monetary machine and it's working, therefore, aided in the development pursued by wages and prices, but only in a secondary and passive manner. The increase in the issue of paper money is within this complex of phenomena not the cause but the consequence of rising prices and wages. At the same time, the fact that it was possible for paper money to be issued in unlimited quantities provided the necessary condition for unlimited increases in prices and wages. Now, notice here, he's try to go claim, Jim, that it's the result of, not the cause of. He's just flipped it over. [48:14] JIM: Yeah. He just flipped the cause. And that's what these guys do. That's what Fed governors do. That's what Fed chairmans do. That's what congressman, that's what guys on Wall Street...He’s basically saying, “hey, you've got rising prices, so we've got to print more money to enable people to pay the higher prices.” Once again, you hit the nail on the head, John, when they say they just reversed it and flipped it over. It wasn't the money printing that was causing this. It was really the higher prices. And this brings me to another quote from Parsson’s where he talks about this depreciation that takes place and this is a quote from Dying Of Money. The phenomenon of unrealized depreciation explained the spectacular beneficial effects of the ripening stages of inflation. When new marks could be turned out much faster than their value could fall and could thereby create real wealth out of thin air. And that's what we've seen. As long as the assets are rising faster than the amount of money that's printed, then you get this artificial wealth effect called a boom or an asset inflation. It's only when money velocity start to increase and money turns over more rapidly that you now begin to see that prices rise faster than you can print money. But in the early stages you get those beneficial effects where the asset inflation is running ahead of the money printing. But in the latter stages it's just reversed. [49:46] JOHN: The tragedy of this whole thing is that if you are in a position to do so you can profit from the inflationary cycle by making the proper investments. But as a rule, the middle to lower classes can't benefit from this. They make enough to get along and maybe in the beginnings of it enough to save a little, but as inflation chews that up they can't even do that. They are just forced to run and run and run. So they feel the pain. They are the ones supporting this whole cycle but because they feel the pain, they then turn to government which in its cartel with its central bank created the problem. Yet they are asking the very same people to solve the problem who actually created it in the first place. JIM: The other tragedy too is it alters the outcome of the economy. The economy goes from producing things, making things, creating value to speculation. And the nature of business change. Now, this is going to sound familiar having just gone through the dotcom era and then of course the era that we're going there right now and this is from, once again, Dying of Money where Parsson talks about: Productive industries changed their names pell mell to names which describe nothing. Boy, does that remind me of the dotcom era. Perhaps to conceal the embarrassing fact that they produced nothing, the nation's keenest business minds devoted themselves to dealing and disdained production as they had similarly done in Germany. He's talking about some of the inflation that took place in the 70s. Production is abandoned in favor of mere business activity; and such production as is carried on is conducted by entrepreneurs of less average ability than where profits are possible only through skillful management. Up till now the idea was to make money only by the goods and machinery or something else. But people are realizing that there is a way to make money with money and save the trip in between. This is what we're seeing today, John, and I want to go back to the speculation, the deal making today. Why build a factory? Go buy someone else and do a deal. And this changes the tendency in this inflationary boom. And what it does is it channels growth into fringe activities – which means activities that constitute the overhead of society – and do not generate any well being for its members. And inflation’s most prominent characterization is feverish hyperactivity. Just look at the housing market the last couple of years or the dotcom era between 97 and 2000. And it is indiscriminate and it pushes through and it creates some malinvestment or abnormality in the economy, and it creates all of these distortions. And the problem is, John, the side effects which are inflation, it's necessary for government to blame shift. JOHN: If we read further from the American inflation: inflation tends to reduce a remark, confusion of culprits and scapegoats. Isn't that what we're talking about, Jim? JIM: Absolutely. Greedy, Oil companies, OPEC, whatever. JOHN: Whatever. And the confusion tends to be similar from one inflation to the other. In Germany the scapegoats were reparations, speculation, the balance of payments, foreign exchange rates, prices, wages, business and labor. Usually somewhere in here too, Jim, don't we see a demand for wage and price control to try to stop this, but it's always short lived. It never works. JIM: Yeah. Because it's these businesses or unions or something like that asking for more wage to keep up with inflation, or businesses trying to raise prices to recoup rising costs. And rather than looking at them as just trying to make it, we blame them so therefore gosh, we wouldn't have this inflation of businesses didn't raise their prices or unions or workers didn't demand higher wages. And that's where the wage and price controls come in. [53:46] JOHN: Yeah. Speculation is another common bogey of inflation. We already noticed that the preoccupation with buying and selling paper investments is characteristically the prime unproductive activity and the prime source of rewards in an inflationary environment. In Germany, speculators were also castigated as a cause of inflation. In truth, speculation and pay for investment service not to cause but for the time being to help ameliorate price inflation. Stock market speculation is a principal relief valve concealing latent inflation pressure. Booming stock market prices are themselves a form of price inflation; normally, the most inflated at all but never thought of as such. The stock market in America harbored a large portion of the latent inflation. But no one disliked it because they were thinking of paper profits rather than the prices of real values. Floods of money which were kept busy inflating the stock market were diverted from inflating other prices. So they acted as a buffer actually. You talk about the money going somewhere. If it goes into the stock market it buffers prices elsewhere. JIM: Sure. And when that money is created as it is being created now, it is going to go somewhere other than the real economy; and that's what acts as a buffer. That's why, John, I expected a capital market crisis as a result of the credit crisis but I've not been in that super bear camp that said a new bear market is going to rise. I expected a correction, but I expected a response to that correction and that's why we built cash and now we are investing that cash as a result of what we're seeing unfold here as this next reinflation expands. [55:34] JOHN: Well, Jim, I think we’ve stretched the point for this week. We're going to continue this whole thought because if there is one thing that's important for listeners to understand it's precisely what is going on right now that number one it has gone on before. Germany saw it, at the beginning of the 1920s as they ran into their mess. We saw it as we ran into our Great Depression here and we're looking at it again. It follows the same pattern every single time that it does. So we're going to pick up the whole concept of dying of money next week. Now it's time to turn to either voices. You're listening to the Financial Sense Newshour at www.financialsense.com.
JIM: Well, here we are. We're just about maybe another month or two left in the hurricane season. So far we've seem to have dodged a bullet. But is the hurricane season really over, and are really are we free and clear of this menace? Joining me on this program is my favorite weather forecaster, Evelyn Garriss. Evelyn, so far a rather benign season. Did we dodge a bullet or do you think there is still some danger lurking out there? EVELYN GARRISS: Well, so far we’ve dodged a bullet and I suggest we remain flexible. [56:54] JIM: Okay that can mean a lot of things but when is the official hurricane season over? Is it somewhere around November. EVELYN: Officially, it's over at the end of November, but officially it was supposed to begin on the first of June and the first storm came in May. JIM: Okay. EVELYN: And in 2005, even though the season was over in November, there was a tropical storm wandering lost in the Atlantic in early January. So the definition of the season may have to change. [57:24] JIM: Well, certainly as we get into the fall months, don't the ocean temperatures warm up somewhat and does that negate some of the possibility of more severe storms. EVELYN: September typically is when the – especially the early part of September – is when the ocean waters have reached a peak and they are at their warmest; and then after that they tend to cool. But for some places like the Gulf of Mexico, they have a long way to cool before they will be safe. They are going to need to cool at least another couple of months before they get to temperatures that won't act like gasoline to a match every time a tropical depression wanders into those waters. [58:07] JIM: I think I'm trying to remember the name of the storm that has possibly gone through there because I know that several of the oil companies have abandoned and taken workers off of some of those oil rigs. What is your best guess of what we might see? You mention to remain flexible, so that tells that the danger isn't completely past. EVELYN: Well, there is a tropical depression which looks like it probably will be tropical storm Jerry. But the good news is that it looks like it won't be developing into a hurricane. The bad news is it looks like it's, at this point, heading around the Louisiana area and, you know, they don't really need any more rain. It will bring some very heavy rainfall. Also, there is another tropical wave. There is a development in the Caribbean that if it veers north and enters the Gulf, also could pose a risk for tropical storm or hurricanes. [59:03] JIM: I know that if we go back to – I don't know if it was 1991 or 1992 where the perfect storm – the Halloween storm which was October 31st, you had an arctic cold front, you had a nor’easter and a hurricane all meet up to form the perfect storm. So what about these tropical depressions mixing it up with maybe some cold fronts? EVELYN: Actually what we're starting to see and one of the reasons why the hurricane season nowadays tends to be lasting longer and have a greater number of storms than they used to is we sometimes have the phenomenon of a storm front from the regular latitudes, the United States veering south entering tropical waters and becoming what's called a sub tropical storm. And when this happens – like I think England did that – you have the bottom of the storm starts to warm up. And if you look at it from a satellite it still looks like a cold front, but if you're going along the bottom like you’re a sailing ship on the ocean, it feels like a tropical storm. And gradually the heat rises and this cold front transforms into a tropical storm and sometimes even a hurricane. That is the type of thing that we're starting to see at the end of the season when you see some of those late November storms. Very frequently, they aren't tropical waves coming from Africa but they are wandering storm fronts that hit the tropical water and get that last gasp of warm air over the tropical water and change into tropical storms. And you can see them. They'll be moving like a regular storm front, cold front, from west to east. They'll hit that warm water and then do a u-turn and come back towards us. Those are always exciting. [60:46] JIM: What about La Nina? Your last newsletter talked about finally it arrived. So let's talk about the implications going forward into the, let's say, fall and winter. EVELYN: Well, it's been an unpredictable phenomenon because initially they were thinking it would develop in summer and saying rather confidently over the next three months. And it didn't arrive until August. In fact, officially the conditions for it started existing around July 28th and it didn't get called an official La Nina until well into August. But one of the things that it does is when you have a la Nina and you and you have it in fall and winter, it tends to bring cool dry weather to California. Just in case you needed more dry. [61:33] JIM: What about the rest of the country. EVELYN: Well, La Nina is in place now and typically what that does is it creates some cooler conditions along the – in California, you tend to see wet conditions and very heavy try rainfall right along the Pacific Northwest coast but not necessarily going inland. So the Rocky Mountains where all of the rivers start may not be getting rainfall, but the coastal people will be dog paddling. [62:01] JIM: Now, you're saying along the coast. Does that mean let's say if I live in Southern California and San Diego, are we going to get more rain? EVELYN: Certainly northern California coast will be getting more rain. JIM: Doggone. They get all of the water. EVELYN: They get it. Yes. But very frequently the rain fall just hits the coast and it doesn't go inland to where the reservoirs are. That can be bad news sometimes. Most of California is going to be having some real trouble with another dry year. You're supposed to get rainfall last winter with El Nino but it didn't come. Now you have La Nina which normally is dry. And you have your California water officials really making plans now for what to do if they have two dry winters and are facing drought. In the east coast, usually what you have is very nice, benign warm weather. I mean this is a great time to be a New Englander. They'll be having a very pleasant warm early La Nina. [62:57] JIM: So global warming for the east coast. EVELYN: California is going to be cooler, wondering if the east coast has lost its mind when they say global warming is hitting again. Also normally, you get drier weather in the southeast except when they get hit by hurricanes. You get these real extremes in weather. It gets bone dry and then a tropical storm hits and everything floods. And as late Autumn hits, normally during a La Nina it gets wetter and wetter along the southeast of the Atlantic coast. [63:26] JIM: All right. Let's move on to winter. Last year we got pretty lucky. We started out warm and finished up cold just as you predicted. What is this year's winter looking like? Can we get lucky again? EVELYN: For California it looks cool and dry. For the rest of the country just like an El Nino you had last year what I call a double dip winter, cool in the beginning, warm in the middle, cool in the end. Usually, La Nina is just the reverse. In fact, the average in the east coast – well, in the East and the Midwest which are the primary gas and oil users, they average a warm winter. But the way it is shaped is it tends to be warm in the beginning and then they have a period of intense cold right around the middle. And then by February it's typically very warm again. And when the scientists go and average they say, “gee! it was a warm winter.” But there is periods in the middle of January when it's just really freezing and the gas and oil use is really high. [11:57] JIM: That could be in a way good news because our storage levels have been drawn down as we're heading into the winter months, especially as oil inventory has dropped. So if it's warmer than normal, maybe we dodge a bullet again. EVELYN: That would be good. I think we stand a very strong chance. I typically look at a number of years that have similar conditions and in about 80% of the time, the cold, the really cold severe part of winter is short enough that the overall winter average is warm. One problem that frequently occurs during a La Nina is the center of the country even where they grow winter wheat gets quite dry. Now winter wheat to survive and do well needs enough snow cover that when a hard freeze comes it doesn't damage the wheat. And in about 40 percent of La Nina’s we have not had enough snow and we've seen some damage to the winter wheat crop. [65:20] JIM: Well, Evelyn, if I was to sum this up, we're on the coast here, maybe Northern California is wetter than normal but only along the coastal regions; but otherwise cool and dry in some of the areas along the coast on the east coast or at least in the Gulf we're going to get, what, wetter conditions? EVELYN: It really varies. In the southeast typically they get a lot wetter conditions. Florida tends to be dry and poor Texas. Remember the year before last year they were complaining about drought. This year they’ve been complaining about floods. It likes like they have a very strong chance of going back to hard drought. [65:56] JIM: Okay. And then if you're along the east cost with the warm weather, will there be rain in that forecast? EVELYN: There should be in late Autumn, but in winter it gets very iffy. I'm looking at the record and it's almost fifty-fifty, which leaves me as a scientist going maybe, maybe not. [66:12] JIM: As we get closer to the winter, I'm going to have to have you back because it sounds like we've got all kinds of variables but winter on the east coast starts out warm. We've got a cold front in the middle. What would that be? Somewhere around the end of December, January? EVELYN: Typically in the center of that area there. JIM: Okay. EVELYN: And if people want a white Christmas… JIM: Okay, so they are going to get a white Christmas and then we finish off on warm side. EVELYN: Yes. JIM: Well, Evelyn, I always want to thank you for joining us here on the program with your forecasts. And it's always good to hear that and especially how that can sometimes influence the investment markets. If our listeners would like to get information about your newsletter, tell them how they can do so. EVELYN: Well, if they get on the internet, they just have to contact Linda at Fraser.com, or they can phone 1(802)658-0322. JIM: All right, Evelyn, well, thanks so much. I hope some of that stuff that’s raining up north this winter in California – those guys get lucky! – they get the rain maybe some of it will drift down here. Well, listen, have a great weekend and thanks for joining us on the program. EVELYN: Thank you so much. I always enjoy talking with you and your audience. [67:29] JOHN: Welcome back to the second hour of the Big Picture, which is quite a number of hours in here on the program. I still think we should be calling this the Financial Sense newsday at the rate we're going, Jim. JIM: Who knows? The news week. JOHN: Or the Financial Sense news channel. All right. The last hour we were talking about inflation and the resulting booms and speculations. But in reality, in the midst of the of all of that, there has got to be some up investment going on. JIM: Well, you know, John, we touched upon this last week in a topic that we called profiting from reinflation where I outlined the two top performing sectors, I think. They have been since this began in the early part of this decade. They have been gold and silver, precious metals; and then energy. These are going to be the mania-type investments. And we talked about that a good portion of one's portfolio should be heavily weighted towards these areas because they are going to be the main beneficiaries of protecting wealth at a time when inflation is rising and the value of currencies are depreciating. And there's a lot of talk out there, “well, gosh, the dollar is going down, I'll be in another currency.” That is one method of hedging against a declining dollar. But remember this, we are on a fiat system and as Louis-Vincent Gave last week talked about there is a possibility of the euro coming unglued as one country, like for example, Italy or Spain start moving away from the union. And I expect that the euro to start falling apart in the next three years; and that's going to create a major problem. And the result, the solution, is going to be they are going to suggest a global central bank and a global currency. That's where we're heading. And the problem is, if you're just shifting out of dollars, you're shifting into other fiat currencies. The euro is a fiat currency. The yen is a fiat currency. The Chinese renminbi is a fiat currency. The British pound, the Canadian dollar, the Australian – these are all fiat paper. And that’s why I prefer tangible goods. So the thing that you need to understand when you grasp a hold of how this inflation cycle works, you want to be owning tangible goods. And at the top of that list, my two favorites are going to be: gold and precious metals, whether gold or silver (I prefer silver over gold, I think silver will out perform gold); and also the energy sector. [2:43] JOHN: But the real danger when we talk about the rollercoaster that goes on in the speculative-type environment is that people are trying to ride the rollercoaster as an investment. So they are thinking very short term and at the first hint that something is going bad, they are jumping out – or panicking really is what they are doing – rather than looking at the long term and just allowing for swings inside of that. JIM: Yeah. And there is the tendency because people focus on price rather than fundamentals. So most investors can tell you everything about the price of something but not about the fundamentals that back the price. Unless you take a long term perspective and follow fundamentals that are playing out, you're absolutely right, John, you're going to be shaken out of the gold market when it dips or pulls back. And Frank Barbera is always fond of saying in the gold market, expect a 25, 30% correction. Those are normal. They happen every single year. But rather than being shaken out of your investment, this is where belief systems, this is where understanding of fundamentals come into play. What you do is you use those opportunities to pick up either more shares, more bullion and you add to your position because what you're looking at is not what price is today. What you're more interested in is where is the price going to be five years from now, three years from now, 10 years from now. And for example, if you're in the gold market and gold pulls back to 650 to 660 and you think the price of gold is going to several thousand dollars or who knows where it goes in a mania, it could go as high as 5 or $6000, that's all your interested in is where is it going to be longer term. Or, if you are buying oil stocks and the price of oil dips from, you know, I don't know $70 to $50 as it did at the beginning of year, then what you do is you think, “wait a minute, the price of oil, I expect it to go over 100 to 200.” And I am anticipating we'll probably see in the next decade oil prices at 250 to $300 a gallon [sic.] and it will still be cheap. [4:49] JOHN: I think you mean a barrel there by the way. JIM: Yeah. JOHN: You said a gallon. JIM: Oh, my goodness, no. Getting a little carried away here! Boom! A little too optimistic here on the price of oil. But if you think that's where it's going to be then once you focus on, at some point prices will peak, they always do. We'll get to a peak in oil prices, maybe we'll have another form of energy that comes on board or central banks will stop inflating. Maybe we'll have a global central bank with a currency back to gold initially – because that's the only way you can sucker people, you have to create value. But at some point the inflation will end and deflation will set in. But until we're going to reach that peak all you care about if you think oil is going to be $200 a barrel, $150 a barrel, then how many shares of oil stocks or oil service stocks do you own. That's all you care about. So when these dips present themselves, you go in, you add to your position, you maybe pick out new companies or you add to those that you already have. And the same thing with gold or silver. You know, any time they bash gold, you know what I do? I just go out and add more shares which I did; add more bullion, which I did; and you just keep accumulating because now you have a chance to buy something that's cheaper. [6:09] JOHN: When we’re looking at these investments that we're talking about what causes a lot of the gyrations because we're seeing more and more of them and they are getting more profound as they go? JIM: Well, you've got to understand that there is this giant pool of liquidity that exists in the world today that is being created through central banks globally, not just the Fed, the Chinese central bank, the European Central Bank, all of these central banks. And just picture this swarm of money as a giant swarm of honey bees and they are just looking for a place to land. And it always changes, John, every inflation cycle always has a new object of infatuation. Normally, you know, you have to have a story with it. So, what's going on behind commodities? Well, China and India. So that becomes the story, and that feeds on it self, that's the fundamentals behind it, there is the story. And then this will just basically get fed on and fed on; and just picture this swarm of money swarming around the globe looking for a place to land. Okay, where is the next place we can get our honey? And so there always becomes these new objects of infatuation for the crowd. And so they just jump from one flower pot to the next looking for the next honey dip; and that's what happens. And today, where you have, I don't know, what is it? 9000 hedge funds, or 10,000 mutual funds in the US, not to mention what we have globally. All of these eyes watching the same thing on their computer screens and that's what happens, all of a sudden oil was hot as we were coming out of the fall of last year leading into the end of the year. Then we got a warm winter as Evelyn Garriss had predicted; and then “okay, warm winter, we don't need oil, the US economy is slowing down, so there is going to be less consumption of oil.” And boom, the swarm moves out of the oil patch and moves on the something next. I think it was technology back then. And then all of a sudden, the credit crisis pops up, so we have a sell-off in stocks, oil gets hit because of warm weather concerns but even though we finished up with a cold winter and lo and behold, had you done nothing but sat on your oil, what happened? The price of oil actually began its rise again from $50 a barrel to where we stand on this Friday at over $80 a barrel. [8:32] JOHN: Okay. So basically you watch the trends, and based on the trends you add to your position. But there comes a point where you're just going to hold on; right? JIM: Yeah. You don't get shaken out of your position because in the early phases of bull markets nobody recognizes that it is a bull market. How many times, John, have you heard every time oil dips, “hey, this is it, the bull market in oil is over.” And there is always various excuses because the media is looking through the rearview mirror: “Oh, China's economy is slowing do you.” One of the reasons given in 2004. “Oh, the US economy is slowing down. Oh, we got warm weather. Or global warming.” Who knows what it is, but it's always something, and it's very short term oriented. So that's why I think if you do – if you're the kind of person that likes to look at charts, I think you're better off looking at long term charts rather than short term charts. And so that if you look at a long term trend [chart] and it is going up, then that tells you that you're still in this trend. And you're always going to have these little dips, these minor pull backs as the markets consolidate the gains of the previous run up. As long as the fundamentals are in place, then that's where you have to just step up to the plate, you take your cash, you redeploy, you add to your existing positions. That’s because one of the things that I have learned, at least in my career, there are very few investment decisions that you really need to make in your life time because most of these trends are long trending in nature and they go beyond a decade. So we had an almost two decade run in stock prices – whether it was Japan in the 80s or the U.S. in the 90s, prior to that we had almost a 18 year run beginning in the mid-60s with commodities all of the way up to the first part of the 80s. So these are long trending trends that play out, take time, there are different phases to them. And you're going to have corrections. But John, how many people do you know are talking owning oil stocks or talking to you about owning gold. Probably if you mention gold, they are going to look at you like you're a kook. [10:43] JOHN: That's been par for the course though for how long. Principally because gold is looked on as a commodity rather than a currency. JIM: Absolutely. But I mean if you were to talk to people and I know you've had conversations with family members and even people that I talk to today, you can talk to them about oil. That's something that people seem to understand because they are seeing it at the gas pump, they’ve seen gasoline prices go from the mid one dollar range to now to three dollars, so that's something real. Most people can understand that. But mention gold and silver and they are going to look at you like “you're one of them.” I remember last year I was at a party and I was being introduced because of the Financial Sense Newshour and things I’ve done here locally. So I was sort of like the little financial celebrity and we got talking about the markets, and I was telling people that I thought the markets were going to go higher because the Fed was inflating; I expected new records on the Dow and people kind of looking at me at that time because it was during the summer and the stock market had gone through a severe correction. And then they go -- the best part is: “Well, what would you be buying here if things are cheap.” I said, well, you can buy blue chips but if you really want to know what to buy, I'd be buying natural resources. I'd be buying energy and I'd be buying gold. And you mention the word gold and they look at you kind of cross-eyed: “Eww, you're one of those people.” So it hasn't caught on with the public and I don't suspect it will until the third phase of the gold market. In the meantime, as this dance of the honey bees continues in the market with short term attention spans where people are looking, “okay, what's the next thing,’ rather than focusing on the long term trend and the Big Picture, the next time the honey bees abandon this sector and move on to something else, that's your chance to pick up things at a cheaper price. And I think that's really how you make long |
