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The BIG Picture Transcript
October 13, 2007
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  Part 1
  Dying of Money: Part IV
  Growth vs. Value
  Part 2
  Other Voices: John Williams, Shadow Government Statistics
  Raging Bull
  Q-Calls

 Part 1

 Dying of Money: Part IV

JOHN:  And now we begin episode four of the serial broadcast Dying Of Money.  Today's episode…doesn't this thing ever just die? 

We're going to be doing this every week.  It's like a bad comedy where you know the guy – remember Jimmy Durante in the first part of it's a Mad, Mad, Mad, Mad World, and he's dying there at the traffic wreck and he's trying to tell everybody where the treasure is.  And they always keep thinking he's dead, but he keeps waking up.  And Buddy Hackett says if he does that one more time, “I'm getting the heck out of here.” 

All right, for the last three weeks for those who haven't been dying fast enough, we've been discussing the good effects of early inflation.  Remember the quote from Jens O. Parsson, why is the good part of inflation up front?  He says:  “Everybody loves an early inflation.  The effects at the beginning of inflation are all good.  There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets and spectacular general prosperity, all in the midst of what are at least temporarily stable prices.  Everybody benefits, nobody pays, that's the early part of the cycle.”

“But in the later inflation on the other hand, the effects are bad.  The government may steadily increase the money inflation, in order to stave off the latter effects, but the latter effects patiently wait.  In the terminal phase of inflation, there is faltering prosperity, tight money, failing stock markets, rising taxes, still even larger government deficits and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies.  Everybody pays, nobody benefits.” 

And that's what we're going to look at this week.  Last week we were looking at the good effects of inflation.  Today we're going to be talking about the bad kind of inflation when you're on the downside of this cycle. 

JIM:  Well, I want to begin our discussion with the recession – a time when economic pain is experienced in the economy.  And what we see in a recession, you see unemployment begin to rise as the economy slows.  Businesses is doing poorly at this point; you hear cries for the government to do something.  So government begins to indulge in what we call monetary inflation.  Almost immediately, the money begins to flow and stimulate the economy.  And we saw that following the inflation of 2001 and 2002.  It was moving into the economy; and it was moving reluctantly into the stock market because the last bubble that we saw with money inflation was the stock market.  So what it did do, however, is while the stock market was going down, as the Fed stimulated the economy with reinflation and lower interest rates, it moved into an asset class called real estate.  So even though we were in a recession, real estate was doing well, real estate prices were going up. [3:09]

JOHN:  And this is basically what the Fed did in 2001 when we were in a recession, and 9/11; and like you say, immediately after that, real estate began to take right off and really we just created another boom and another bubble, but there is an end to this whole cycle.

JIM:  Sure.  Because the result was a boom.  But one of the consequences of money printing was the dollar lost value by the amount of monetary inflation.  In fact, the dollar index, which reached a high in almost 2000 at 121 dropped to 80, so we saw a big depreciation of the dollar.  And it's important to understand that as a result of this artificial boom, we're not really creating real wealth.  It's not being created from production, building new plants, expanding output.  It's what I call inflated wealth.  And what follows this boom is rising prices which is what we're now seeing. [4:04]

JOHN:  Well, basically we're coming back to the actual hard-core law that there is no such thing as a free lunch.  Sooner or later everybody pays up front; nobody pays at the end.  Everybody pays but it's not an equal payment.  Have you noticed that?  They have to make up for everything that everybody didn't pay earlier on; even if the people at the end didn't get the benefit.  And Ron Paul recently actually pointed this out.

RON PAUL:  Yes.  I think this is not a consequence of free markets.  What’s happening is there is transfer of wealth from the poor and middle class to the wealthy.  This comes about because the monetary system that we have.  When you inflate a currency or destroy a currency, the middle class gets wiped out.  So the people that get to use the money first, which is created by the Federal Reserve system benefit.  So the money gravitates to the banks and to Wall Street.  So, that's why you have more billionaires than ever before.  Today this country is in the middle of a recession for a lot of people.  Michigan knows about it.  Poor people know about it.  The middle class knows about it.  Wall Street doesn't know about it.  Washington D.C. doesn't know about, but it's because of the monetary system and the excess of spending.  As long as we live beyond our means we are destined to live beneath our means.  And we have lived beyond our means because we are financing a foreign policy that is so extravagant and beyond what we can control, as well as the spending here at home.  And we are depending on the creation of money out of thin air which is nothing more than debasement of the currency.  It's counterfeit and it's a natural, predictable consequence that you're going to have people benefit from it and other people suffer. [5:37]

JIM:  You know, you're exactly right.  In fact, Keynes, which is his philosophy that governments follow, understood this very well, John.  In one of his essays called Inflation As A Method Of Taxation, he wrote:

It is common to speak as though when a government pays its way by inflation, the people of the country avoid taxation.  That is not so wrote Keynes.  The same arguments, which I hear applied to the note issue can be extended with a few modifications to all forms of internal government debt.  What a government spends, the public pays for.  There is no such thing as an uncovered deficit. 

JOHN:  Well, if Keynes knew about the consequences of his actions… But then if that's true, I mean if you all know there is a day of reckoning, why do governments repeat these mistakes? 

JIM:  Because inflation is a hidden tax and they can use spin usually to shift blame away from themselves.  You know it's government that's creating the inflation.  So John, what did you see when you saw rising oil prices?  Gosh, it was the greedy oil companies.  Or when gasoline prices went up in a crisis, it was greedy gas station owners.  And you heard talk about rising wages – the Fed made reference to that earlier in the year – and now you're seeing strikes as labor wants to have an increase in their wages to keep up with living standards.  And so there is always something that you can deflect it on and that's why inflation, as Ron Paul has talked about, is another form of taxation.  But it's a hidden tax and it’s the one that politicians love the most. [7:14]

JOHN:  Yeah.  Because of the fact that they can off load the responsibility for it.  The public is a long time in catching on to what's really going on until it really begins to hurt and then it usually it begins to show up just as – what would we call it? – non-confidence on the part of the public in government.  They know something is wrong, but they still don't know what's wrong, so to speak.

JOHN:  Sure.

JOHN:  So when we get to this point, what comes next? 

JOHN:  We now come to what I call the most important law of all inflations and that is the law of the exponential inflation.  Think of this law in a way as a law of geometric progression.  Every inflation must compound itself at a geometrically increasing rate in order to continue to have the same beneficial effects as in the beginning.  So every reflation cycle will take more reinflating to have some of the good news.  I mean just take a look at the massive doses or injections that central banks have poured into the economy from the mid-August crisis.  I think it's, what?  Something like half a trillion dollars.  [8:16]

JOHN:  So in practical effect, what we're saying here is that every inflation once begun becomes continuously worse.  Only it does it in up-down cycles, so the ride gets worst as you get towards the end, gets more violent.

JIM:  Sure.  And we're seeing some aspects of this inflationary tax, which is the erosion of wealth.  And I want to talk about something called money wealth, which is the mother lode from which the government mines prosperity by the process of inflation.  Inflation depends for its effectiveness on a large body of money wealth to be taxed.  [8:50]

JOHN:  Okay.  So I'm guessing what you're referring to here is money wealth.

JIM:  It's really paper property.  It is essentially debt, John, which in essence is a fixed claim or a part interest in somebody else's wealth.  As the value of money falls the size or interest in real wealth diminishes.

JOHN:  Okay.  That one you'd better explain.

JIM:  Let's take a look at, for example, something that's familiar to all of us.  Let's take a home.  You go out, you buy a home and let's say you put a down payment.  Well, maybe not in the last cycle, but typically you put a down payment on a home, and then what you do is you go out and you borrow.  That borrowing or that mortgage represents paper debt or money wealth.  It's a fixed claim on the house that you own or a part interest in your wealth.  So the bank, even though the home is in your name, the bank has a claim on that through its fixed claim through a mortgage.  That's what I call money wealth.  It's paper wealth and it's usually a fixed claim on somebody else's asset, which is what all debt is.  [9:59]

JOHN:  Well, Keynes himself had a real disdain for money wealth or – well, what would he call, aristocracy.

JOHN:  In his age, a lot of the money wealth, a lot of the bond holders or coupon clippers as he used to call them were the aristocracy.  And you're right because negative interest rates resulting from deliberate inflation, as we have today, is not accidental.  Actually, Keynes knew exactly what he was doing.  His goal was really to euthanize what he called the rentier class.  And his objective was the ultimate extinction of the holder of money wealth.  In fact, in his own words he wrote:  His inflation policy was a process of continuously disinheriting the holders of the last generation’s fortune. 

That is why if, for example, you own a fixed income investments such as cash, bonds, annuities, beware that the announced intention of Keynesian economics is to in effect bring about the extinction of this wealth.  The holders of this money wealth are the sheep that are going to be shorn in a great inflation.  [11:08]

JOHN:  What is really interesting is that Lenin understood that a heavy progressive tax and a central bank would ultimately eliminate the middle class.  Here it would seems like Keynes really wanted to eliminate the upper classes whom he regarded as the idle rich – you know, coupon clippers – who were fundamentally less useful than what he called the active entrepreneurs or workers.  But there were some things I don't think he saw in this whole thing.

JOHN:  Sure.  And problem was that the victims weren't a lot of the rentier classes he talked about but were mainly the poor and middle class.  I'm talking about people that had modest savings, pensioners, workers, people living on fixed incomes.  And in reality, the rentiers who paid for an inflation are not the high income taxes, but the low classes and the middle class because they don't have the means.  If you have the means, John, you can profit from an inflation:  You can invest in energy; you can invest in gold;  you can invest in real estate, hard assets – things that go up in inflation. 

But if you're just basically working for a wage, your wages never keep up with the true cost of living.  It gets harder and harder for you to maintain your standard of living, so your living standard gets eroded through this inflation.  It gets harder for you; you've got to run faster just to keep even.  And we saw that basically in the 70s when we went off gold-backing.  The inflation rates got so high that it took the second spouse, that's when women really moved into the work force because it now took two incomes to support a family whereas when we had a stable currency that was backed by gold, usually one bread winner could take care of the family.  But with inflation, you get two things:  Your cost of living goes up faster than your wages; and two that pushes you into a higher tax bracket.  So taxes and inflation erode your standard of living. [13:06]

JOHN:  Yeah.  That also puts real stress on those families too because now two people are working and who is raising the kids and what philosophy are they being taught, how good is the education.  We've seen this really has sociological consequences to this.  Even Lenin understood. Remember, his goal was to get the bourgeoisie.  That's why he wanted to get the middle class.  But like you say, it always comes crashing down on the back of everybody from the middle class on downward.  They don't have any wiggle room.  They can't protect themselves from this. 

It seems like once this process begins, there are sort of two options here.  Number one, if you just stop inflating, the inflation stops.  But that's always painful and governments never really want to do that, so they are going to continue doing it.  So once this process starts because they won't have the integrity to stop.  I can't think of any historical except one, where it ended peacefully.  It always seems to go to its own violent conclusion wherein money is actually destroyed. 

It's also interesting to know, by the way, Jim, whenever countries get to that stage, they always look for somebody to make war with because that distracts the public from what is really going on. 

JIM:  Inflation, trade wars – what was it Bastiat said, when goods don't cross borders, armies do.  The problem, John, is once you're right.  Once this process begins, the real value of money wealth must be either eroded by inflation or amputated by bankruptcies.  And inflation is a much easier road to follow for most politicians.  We have a good example of this today with the subprime losses.  People are defaulting on loans, they are walking away, bankruptcies have doubled year-over-year, and they’re also up significantly in just the last month.  And so what do you hear talked about.  You hear talk about bail outs, you hear talk about workout plans.  Gosh, there must be three or four bills before Congress talking about bailing out the pain, because bankruptcies are very painful.  A easier and more palatable way for politicians is basically to inflate it away.  [15:12]

JOHN:  Yeah.  For another state so far.  I guess what I have always wondered is why people never wake up.  You know, when I walk into a bank, I'll even ask what causes an inflation and the teller will look at me and go, “I don't know.”

And you know, I kept thinking that's why. 

JIM:  It's the institution you work for.  Banks create inflation through the fractional reserve system.  The Federal Reserve creates inflation by monetizing debt, injecting reserves in the banking system.  The government creates inflation when its deficit can't be financed with existing debt and must be monetized.  [15:48]

JOHN:  What keeps this inflation thing going?  First of all, the governments don't want to back down on it, but basically it’s the fact that at some point the public really has to be fooled.  That's what's happening.  Congressman Jim Bunning of Kentucky actually said that: how long could we go before we stop lying to the public.  He said that.

JIM:  Sure.

JOHN:  Don't you think people gently wake up to the fact they are being taken to the cleaners, they are being fleeced.

JIM:  Well, sure.  You're right.  But the inflation scam depends on gullibility of the persons being fleeced, John.  The economics of disaster commence when the holders of money wealth revolt.  They express that revolt by a simple act of getting rid of their money and declining to hold it in the future.  When people finally revolt, you're not going to see protests in the streets, flying flags, demonstrations. 

What happens when they get to the hyperstage of inflation, smart money has already gotten out of the paper.  In fact, we see a good example of this, the rats are jumping ship themselves.  The central bankers are doing the same thing through sovereign funds by buying gold, they are buying real assets. So what does it tell you when central bankers are saying, “you know what, we don't want to own paper wealth as much anymore?”  And they are now, I forget what figure is.  It's something like one-and-a-half trillion dollars or 1.6 trillion dollars in sovereign funds.  They are going into real assets.  That has political connotations.  But what happens is people finally wake up and they go, “wait a minute, this money that I own isn't holding its value.  It's depreciating while I hold it.  I want to get rid of it as fast as I can.”  And that's when the revolt comes when people finally wake up and say “hey, I've been fleeced.” 

But here is the key thing, though.  When they discover that, and they start dumping and getting rid of their dollars, what happens next is money velocity – which has lagged behind, let's say, the natural level of inflation throughout the inflation creation stages with this monetary pumping – it begins to multiply as the holders of that money begin to dump.  In other words, the demand for money falls and as a consequence its value, like anything, when there isn't a demand for it, guess what happens?  The price drops.  And in this case money gets devalued.  But this time it begins to accelerate in that process.   [18:12]

JOHN:  What you're saying is it's a game of paper hot potato.  People don't want to hold on to it any longer than they absolutely have to.

JIM:  Sure.  And they get rid of it, and that's why the Fed pays a lot of attention to inflationary expectations because they want to see, you know, how much do we have them fooled at this time.

JOHN:  It's wonderful. 

Growth vs. Value

JOHN:  One of the things that struck me as interesting is the whole relationship between taxes and inflation because you remember Jens O. Parsson said that in the end time when inflation goes crazy, then government is typically taxing the heck out of people as well.  Inflation, Ron Paul calls it a hidden tax.  Where do the above board taxes come into this? 

JIM:  Well, part of the process of keeping the masses in check is through wealth distribution.  And what happens is government clips more of the inflationary wealth through taxes.  It then redistributes it to the lower and middle classes, who are really getting fleeced.  And they do that through entitlements as a means of sort of mollifying the masses who are being fleeced through inflation.  And you see it in this political campaign.  You know the inflation rates are higher than what we are reporting.  You know the unemployment rate is higher than what we're reporting.  You know the economy is growing at a lower rate than what we're reporting.  If you deflated it by the true inflation rate, we're in a recession.  But what happens is people are becoming disenchanted because they are going to the grocery store, they are seeing chicken prices, carton of milk going up, a visit to the doctor going up, their kids tuition – everything is going up.  So what happen is the politicians say, “hey, look, what we're going to do is give you a free lunch.  We're going to give you a college education.  We're going to give you health care.  We're going to give you some new goodie or some new entitlement.”  And it's done to sort of keep the masses in check and keep them mollified to avoid a revolt.  Because what happens, John, when your pay check, you get a cost of living increase and let's say your COLA is tied to the CPI which is artificially manipulated and you get a 3% raise like my buddy that works at the bank.  Well, you know, doggone well that the inflation rate is higher than 3%, and after taxes on that 3% raise, you're falling further and further behind and keeping up with inflation.  So what politicians will do is they'll come up and say we're going to raise taxes on somebody else other than you, and we're going to take that and give you a bennie from it.  And that's exactly what you're seeing right now.  [21:27]

JOHN:  Obviously, at some point or another, remember Peter Falk’s great line in the Great Race “Professor, the jig is up.”  Sooner or later the public does catch on that all of the words out of Washington or wherever – wherever your capital is – don't match your reality.  So how do the politicians figure out when the public figures out when the jig is up?

JIM:  They use a monitoring device, and this is what I call the gullibility index, which is nothing more than what the Fed refers to as the inflationary expectation index.  And that's why, John, the Fed keeps a close eye on it.  You heard it in Bernanke's July testimony on Capitol Hill.  And you hear it in various Fed speeches.  And that's why whenever it rises, the first thing you'll see is the open mouth committee will go out and start giving speeches, start talking tough on inflation –  “we're going to get tough, we're going to raise interest rates, we're concerned about this” – which is what we were seeing in April, May.  But it's all a ruse because the economy is so indebted today, they are mainly limited to playing the confidence game through what I call the open mouth committee, which they do that, all of the time.  The dollar started to go down and what have you seen the last couple of weeks, “well, we had to lower interest rates but we're still concerned about inflation and we think the economy is doing okay and we're encouraged by the decline in the core rate.”  So, even though inflation is going up for everybody, they are telling everybody the rate of inflation is going down.  [23:00]

JOHN:  So if we try to frame where we are right now in the line of things.  We're seeing some good inflation right now with rising stock prices but we're also starting to see the bad inflation effects.  This is increasing as prices begin their climb.  The true rate of inflation is probably in the what, 6 to 7% range, and probably headed much, much higher, as we go through more reinflation cycles.

JIM:  Absolutely.  And that's what I expect to see unfold.  I expect stock prices to get higher as the Fed cuts and reinflates.  They will be higher this year by the end of the year.  They are going to be much, much higher next year as we approach the election because they are going to be ramping it in every single way next year.  And also I think you're going to see currency devaluation wars next year as other countries devalue their currency to keep their currency from rising rapidly against the dollar.  And so that's just going to be very favorable.  You're going to see rising asset prices, but, John, concomitant with that, you're also going to be seeing rising real prices.  There is just too much inflation imbedded in the system.  So you're now going to start seeing the real bad effects of inflation which are now starting to surface for the first time.  We didn't have this back in 2001.  We will have it in 2007 and going forward.  [24:19]

JOHN:  And next week, Chapter 10 of the never ending story of the death of money.  It needs a da-da-da-duh in there – like that. 

All right, you’re listening to the Financial Sense Newshour at www.financialsense.com.  That's like making sense of something, not cents as in dollars and cents.

I’m Andy Looney.  I took my wife Sandy to Canada – you know, C-A N-A D-A, eh? The Canadians were really nice people.  In fact, I could tell they really like us.   They kept saying how far the Loonies were going these days.  I don’t know what they saw in us but I really felt welcomed.  Sandy did too.  Wouldn’t you?  I did.  The Canadians were also very excited about something called parity.  I thought parroties were big colorful birds from Brazil.  So I was surprised Canada had them too.  Then my wife Sandy said that it really meant that a Canadian dollar will buy a US dollar.  That hasn’t happened for more than 30 years.  I guess they have a reason to be happy.  I wasn’t happy because my trip to Canada cost more that it would a year ago.  Would you be happy about that?  I’m not.  Sandy wasn’t.  Oh well.  If you go to Canada tell them that the Looney’s sent ya.  You’ll see how popular we are there.  I’m Andy Looney for Financial Sense.

 Growth vs. Value

JOHN:  Speaking of Andy Looney here and Canadian currency, it's interesting now because before right on the border towns the Canadians would accept dollars for whatever you were buying there because they knew the dollars were worth more, right?  So, sure, they were willing to take dollars for the same dollar amount.  There are signs on gas stations saying sorry we're no longer accepting US dollars.  Well, see if we like you anymore.  Oh, yeah, you were going to stick with us when we were good. 

JIM:  Yeah.  But they like the Looney’s.  I mean, you know, it's nothing against us Americans.

JOHN:  All right.  We have been talking about broad macro themes here on the program for most of the year.  Your position:  Three problems erupt in the economy and markets which would lead to a broader reflation theme.  Obviously, how you would invest under reinflation is vastly different than when we were recovering from the last recession.

JIM:  That, I believe, is going to be the investment key here, because from the perspective of the business cycle, what we're looking at here is I believe we're going to see a mid-cycle slow down, which is in effect an extension of the business cycle through monetary and fiscal stimulus.  And you know, the one aspect of this late cycle is that there is more inflation in the pipeline.  This is evident whether you're looking at CPI or PPI numbers.  In fact, on the day you and I are talking, John, they released the PPI numbers.  It was up 1.1% in September.  It's annualizing in the double digits and the year-over-year numbers are up 4.4%.  So forget the core rate stuff.  So we're operating in a different part of the cycle today, which is obviously carrying over into an investment strategy.  [27:56]

JOHN:  So in a reflationary climate, where are you going to put your money to work?

JIM:  In this kind of environment, I think you want to be invested in things.  And especially under a slowing economic environment,  you want to be moving into, I believe, large cap growth stocks and you also want to own companies that have a large presence overseas.  Or, you may want to own international companies.  That’s because if you take a look at economic growth rates, the strongest economic growth rates are going to be overseas.  The US is no longer the locomotive pulling the train.  We’re the caboose.  So in fact you're seeing this strong growth of what I call the BRIC countries – Brazil, Russia, India, China. 

It's also reflected too in our trade numbers, our exports are growing at a faster rate than our imports.  And I expect – and you've seen this since the beginning of the year, the dollar has gone down every month – and I expect the dollar to go even lower.  And that's going to boost the bottom line of international companies.  And a good example is on Thursday:  Pepsi reported its earnings and they beat expectations.  The reason behind that is Pepsi's international earnings jumped 19%.  Their revenue overseas jumped up 22%, and they made a 6% gain from a currency translation.  So this is the kind of thing that benefits the large cap companies, international companies, because number one, they have a strong presence overseas where they get a lot of their sales.  Also, you know, if they are selling in euros or they are selling in yen or selling in Loonies, you know, you translate that back into dollars and you get a currency boost to your bottom line.  [29:37]

JOHN:  So international themes is a key components for investing today?

JIM:   Absolutely.  In fact, if you take a look at the S&P 500, the top companies within the index derive most of their revenue from businesses, not consumers.  In addition to that, a good portion of their sales come from overseas.  The gains they make from the currency, John, are what I call the icing on the cake.

JOHN:  Why do you believe in large caps over small caps anyway?

JIM:  Well, I want to differentiate that view because I believe that applies to the general stock market.  When it come to gold, or gold stocks, I actually prefer the juniors versus large cap miners.  But getting back to the general stock market, if you take a look at, for example, large cap stocks, they tend to out perform during mid-cycle periods when you have four conditions present in the markets and the economy. 

The first of these is market volatility.  As market volatility increases, demand for safety comes into play.  So people are saying,  “holy cow, this market is getting volatile.  Maybe I'm going to take less risk and I'm going to become more cautious.”  And so you see a move to the big large cap, blue-chip stocks and you're seeing a reflection there and that the big, blue-chip companies are doing very well. 

A second condition, which comes with a cycle slowdown is earnings begin to slow down because the economy is slowing down.  So therefore, you want to be in growth.  And growth that has an international presence because that's where the strongest economic growth is taking place.  It's not here in this country.  It's overseas. 

A third condition, I think that comes into play here is when credit spreads widen, as they have (or actually, since mid August when the crisis in subprime began), you want to be in companies that are flush with cash, have strong balance sheets and don't need to tap the debt markets as readily to run their business model.  That’s because if you have to run rely on debt right now, the cost of debt is going up.  So that's why the bigger companies, the more international companies, stronger cash flow, less debt, stronger balance sheets, so that's another condition.

And finally, when you start to see consumer delinquencies rise as you're doing now – we almost doubled last month, you also are seeing spending begin to slow down – you want to own companies that get a good portion of their revenue from businesses and a good portion from international. 

And today, all four of these conditions are in place and to me that adds up for large cap growth stocks versus, let's say, the value stocks.  And a lot of these growth stocks, John, have really done nothing over the last couple of years.  The big movement when the bull market began in the summer of 2002 has been in small caps.  [32:32]

JOHN:  I know you've been a very avid investor in natural resource companies, everything from gold to energy.  Is there anything else you'd like here besides natural resources or, as you like to call them, things?

JIM:  Well, one area that I think is doing well and one area that we like is technology.

JOHN:  I can just see the coffee being spat out and the mugs being overturned as you say this one, after what we went through in the 90s.

JOHN:  If you look at what is doing well this year, at the top of the list the S&P 500 is broken up into ten sectors.  The very top of the list, obviously, is energy.  It's up 31% this year.  Second is materials which is up 23%; and following materials in third place is technology which is up 19%.  So I think going forward in and especially next year and in particular the fourth quarter of this year, I expect technology to be a very, very strong performer.  And you're already starting to see that with the NASDAQ finally beginning to outperform some of the other markets and the other indexes.  [33:34]

JOHN:  I know up in the now it hasn't done well and the NASDAQ is still down, what, 44% from its peak back in 2000?

JOHN:  Yeah.  But take a look at it this way.  I expect after 7 years of underperformance...And that's exactly what you've seen.  You're exactly right, the NASDAQ is roughly up about, you know, you're right, it's still down about 40%.  The high was back in March of 2000 with the NASDAQ hitting a little over 5000; and today as we look at NASDAQ it's somewhere around 2800.  So I think it's going to move up on the performance scale. 

There's another reason I like technology and that relates to energy.  A lot of the technology companies are moving into alternative energy from solar to wind to developing enzymes to breakdown cellulose and that is going to create a more efficient ethanol.  So if you look at the approaching energy crisis in oil and electricity – we're going to get hit on both fronts so it's not just going to be [oil],   it’s also going to be electricity, John.  I don't know what it's like in your neighborhood, but any time it heats up as we get warm spell or Santa Ana’s here in southern California, we get rolling black outs.  It happens every single time the weather heats up.  We just don't have enough base load here in our grid system to handle the electricity demands, so what we get is rolling black outs.  And each day for three or four hours they shut power down to your area.  So we've got an electricity crisis that's coming here.  So it's going to be the private sector that's going to figure this thing out and come up with a solution.  If you look at government solution such as corn-based ethanol, it's been a failure.  It's very inefficient.  It's driving up food costs.  So, no, John, it will be our technology companies that create the solution to the energy crisis.  In fact, you can see this – a lot of the high tech billionaires are moving into clean energy technology from the founders of Google, all of the way to Bill Gates.  So it's probably going to surprise some people, but I'm very bullish on technology.  [35:45]

JOHN:  Something that did intrigue me when we started into this part of the conversation, Jim, was technology; principally because my whole career has revolved around it.  You know, they are saying that as people get older, the baby boomers are not very good at technology, and I go, “Oh, I am.  I stay with it.”  But technology is always a moving target, too, because there is always something new evolving into that field.

JIM:  And we’ve seen so many technological advances with computers.  Take a look at the stuff that we do digitally, the internet, look at how much that changed our life.  John, just think of how many things that have come out over the last couple of decades.  It's hard to imagine that we once lived without cell phones.  Now they are ubiquitous.  It's hard to believe that we could live without IPods or email or the internet.  Look how much that has changed business.  For example, look at the major impact it's having on the media itself, especially newspapers; and especially, for example, even the major networks where they keep losing their audience because they are becoming less relevant.  Who at 6 o’clock wants to sit down and watch the evening news as if you didn't know what happened during the day?  [37:07]

JOHN:  First of all there has been a perception of media bias, so the audiences have divided out based on the ongoing services like CNN or Fox or whatever.  But you're right.  In other words, I can't remember when I've watched the evening news because I'm in tune with CNN, Fox, C-Span and CNBC all day long.  That's what we monitor here.

JOHN:  Sure.  What's the first thing I do when I get up in the more morning, log onto the computer, I go to all of my internet sources, I start pressing the print button.  By the time I get to the office I've got a stack of paper that's one inch thick.  Then I get to the office and I've got other access to information that I get from special services that I get on-line; I go to my Bloomberg.  So I've got two inches of information and news that I start out my day.  So what's Brian Williams going to tell me at 6pm that I haven't read already?  And I think that's why technology is changing that. 

And that's why I really think technology is going to change the energy field.  And a lot of stuff that we have already, we know that for example, we can build a more efficient, safer nuclear power plant today.  There are new technologies that are coming out like harnessing solar through the use of what we call solar mirrors that will heat basically a pipeline of water that will create steam power that can be stored.  So there is technology coming out there.  There's also technology that's coming on the wind front where we're going to be able to store some of that power and then recycle it.  So there is something that they are working on right now where corn ethanol is very inefficient.  It's highly corrosive.  You can't put it in a pipeline.  And they are talking about cellulosic ethanol and what they are working on, they need to develop this enzyme that breaks it down – everything from switch grass to other forms of basically, John, garbage – and turn it into a supply source.  But they need an enzyme to break it down into sugars so we can turn it into ethanol.  And they are working on that.  But I think they are going to come through with a breakthrough because a lot of smart people on venture capital are getting behind this.  And a lot of Silicon Valley if you take a look at microchips which are made from silicon it is also used in solar arrays.  [39:28]

JOHN:  I guess that also means you could produce energy off the Financial Sense Newshour because it's a steady supply of garbage.  How is that? 

JIM:  Your true energy source. 

JOHN:  Your true energy source, the Financial Sense Newshour, listen to it and then light your home with it.  How’s that?  I think we can sell that.

JIM:  Maybe we'll go public with that.  But seriously, the technology companies and the venture capitalists are pouring literally billions and billions of dollars into alternative energy because they see rising energy prices.  We're already looking at, when it comes to electricity costs going up in this country from 10, 11 cents a kilowatt hour going up to 15 cents maybe as high as 16, 18 cents.  That's baked in the cake because we haven't built the plants to keep up with the population growth.  We haven't built the plants to keep up with the economic growth. 

And you know, everybody says,  “well we consume less energy.”  But you take a look at what we have, the appliances in the home today: computers, big screen TVs, IPods, charging your cell phones, all of the electronic devices that we have.  I mean just look at the complexity of cars today from GPS systems.  I've seen a new line of cars where they are actually putting MP3 players, hard disk drives in the cars so you can record your music in the car.  All of the things that we're coming up with technology today, all of it, in essence, requires energy.  And that's why I think the technology companies are picking up on this, especially clean energy whether you're concerned about global warming or you're just concerned about powering the economy.  I mean you've seen companies like Cypress Semiconductor which invested in solar power and then eventually took over control and spun it out. 

So a lot of the technology companies will be moving in this area.  And that to me is the one hopeful sign that I see.  Because if you had to leave it up to the politicians we'd be in a permanent crisis, and anything they would come up to solve the crisis would make the crisis worse than it actually already is.  And you just get a good feeling of that – just watch the political debates and watch what these guys are proposing and they are so out of touch with what is actually going on in the energy sector whether it's electricity or finding means to power planes, or move and transport goods around the world.  [41:54]

JOHN:  That's some of the debate going on on C-Span I think over the last weekend was: does the government have to get involved or can the free market do it?  And one person said the free market will ultimately do it, but the government needs to push the ball to get this going.  But they are getting the wrong things going.  That's the problem.

JIM:  Well, politicians don't look at what the right thing to do is.  Politicians look at which constituency group can I reward and benefit because they contributed to my campaign.  And if you want to look at a government solution, just look at corn ethanol and you don't have to say anything else.  It's inefficient, it costs as much in energy to produce it, so it's net energy neutral; and that's not to mention the side effects that you see spillover in food, and what it's doing to our water tables, what's it's causing to our imports because corn uses more fertilizer.  So our fertilizer costs which are made from natural gas, that goes up.  I mean, John, it just spills over and over and over again.  And so that's why the worse thing that we could do is it have government come up with a solution.  Government should get out of the way and let the private sector work because the private sector, if allowed to, will solve the problem.   [43:05]

JOHN:  And what do you think the random chances of that happening are? 

JIM:  Well, in an election year, very slim.  But you know something, free markets have a way of overwhelming governments.  I mean if somebody comes up with a silver bullet for energy that makes it very efficient, that brings down the cost; that can provide and get government out of the way because remember politicians can do all of this quirky stuff and put up roadblocks.  But, John, if you start having rolling black outs on a regular basis, if you start going to the gas station and you can't get gas or you go to gas rationing and you start becoming inconvenienced as people were in the 70s, you get one ticked off voter group.  And that's eventually what's going to happen.  And people will be so inconvenienced they are not going to want to hear “save the planet.”  They are going to want to say: fix this inconvenience.  You've made my life miserable as a result of it.  [44:02]

JOHN:  And again you're listening to the Financial Sense Newshour at www.financialsense.com.  Coming up in the next part of the Big Picture we're going to be talking about a raging bull.  And you might guess what we're talking about.  Well, you'll have to tune in next to see what's happening.  We'll be taking calls from the Q-line from people who have been calling in this week to make comments and ask questions.  We'll be back.

 Part 2

 Raging Bull

JOHN:   Listen.  I never remember anything on Friday afternoon.  Oh, we're back.  Don't tell the listeners that, Jim.  Welcome back to the Financial Sense Newshour.  The second part of the Big Picture and we're going to talk about a native American story.  It's called the story of Raging Bull.  I haven't gotten it written yet, so maybe we out to talk about something in the meanwhile.  Speaking of bulls, you've been bullish on precious metals for as long as I've known you, which is quite some time.  But I don't think I've ever seen you this bullish right now.  Especially –. 

[Sound of  dog barking in background]

JIM:  Your dog is bullish too. Does Lodo like the bullion or the stocks? 

JOHN:  It really depends on whether she invests with Purina or Alpo.

JIM:  Okay.

JOHN:  Anyway, I don't think I've ever seen you this bullish on the market before.  That's where we were.

JIM:  Well, you know – get your dog in the background.  Maybe we can get my dogs to chime in. 

All of the stars, John, are lined in perfect alignment for gold.  You've got the monetary environment going on with expanding liquidity and competitive devaluations because I think that's what's going to be becoming next both from Asia and from Europe.  And let's face it.  No country right now wants a strong currency.  So if you look at all of the major currencies and price them in gold, the price of gold is rising; or another way of looking at things is that all currencies are depreciating against gold.  [1:33]

JOHN:  We should point out, though, I would think you're not as big on alternate currencies as a hedge against each other, though, because they are all like life boats from a ship.  They are all sinking.  Some of them just have more water in it than another.

JIM:  Exactly.  They are all depreciating.  So it's a question of jumping on...you know, it's like a hot potato:  Which one is depreciating the fastest?  

But that's why my favorite currency is gold and silver.  It is and has been throughout history real money.  It's the only money that isn't depreciating.  If you take a look at all of the major currencies today, the Euro is a fiat currency, the Yen is a fiat currency.  So are, let's say, the popular currencies like the BRIC countries that are very strong because of their natural resources – whether you're looking at Brazil, Canada or Australia.  So what I believe you want to do is own … you can own companies in those countries because you get a double kicker from the currency, but in the end, gold and silver are the ultimate currency.  That's what's going to keep you above the inflation rate.  That's what's going to create real wealth and preserve wealth at a time when all paper money – as we've talked about over the past four weeks – is dying.

JOHN:  Well, if we talk about paper as being a driver for the gold bull market, is there anything else that's involved in this – another factor?

JIM:  Sure.  And this reflects once again going back to monetary reflation.  Investment demand.  You know, I saw this when I read the CPM 2007 Gold and Silver Book.  And one of the things that CPM talk about is they had never seen gold buying be this strong and this continuous as they have in this new decade.  Six years in a row, gold buying has been massive, John, and it's not just locally, it's not particular to the United States or to Asia.  It is global in nature.  And the demand is just going to get stronger.  And it's been going on for six years and it's going to get bigger in my opinion in this next reflation cycle because people, the smart money knows what is happening to money.  The smart money began moving into gold when it bottomed somewhere around 2001 and it's been doing well ever since then.  But I think more and more, there is a growing recognition globally that currencies are devaluing.  And so what is happening is you know, yes, Western central banks have been dumping their gold.  But the other side of that equation is when a central bank dumps 500 tons of gold, the question ought to be who is buying the 500 tons, not who is selling it. [4:27]

JIM:  Yeah.  What about supply?  Aren't there new mines coming on stream that are going to increase the supply as well that can possibly meet some of this demand so that will take a little of that pressure off?

JIM:  Sure.  There are new mines coming onstream.  But John, there arre also other mines that are depleting.  South Africa, which used to be the largest producer of gold in the world, it's seeing its production decline 7% this year.  On top of that, you know, everything from the cost of energy, the environmental movement is making it more expensive to produce gold.  [4:50]

JOHN:  And an example of that? 

JIM:  Well, if we just take a look at the last – we only have production figures for the second quarter of this year by region, but if you look at:  South African costs – cash costs to produce gold are up 17% year over year; Australian cash costs are up 48%; Canadian cash costs are up 23%;  in the US, cash costs are up 42%.  You've seen this from a lot of the major gold miners such as Newmont which have been talking about lower ore grades because they high-graded a lot of these mines in the 90s.  They've been talking about their costs going up and for the US, 42%.  And in the UK, 17%.  Average industry costs have gone up 25%.  So, John, yes the price of gold has gone up.  And like the same thing that's occurring, it's amazing to see the parallels between the energy industry and the gold industry because energy costs – the cost to produce oil in 2006 went up 31%; and here you're seeing the cost of production on gold going up 25%. 

So you've got a very favorable demand and supply scenario, but the miners are seeing their costs go up, so that's even – despite the fact that gold prices have been going up, they haven't gone up far enough to offset inflation and production costs.  So the price of gold is going to go up much higher.  When it does, you know, John, many of these mining companies are going to go from what I call mediocre businesses to great businesses for a period of time, because when gold is up a thousand or over a thousand dollars or it goes to $2000 an ounce, imagine what's going to happen to the bottom line to a lot of these miners.  [6:42]

JOHN:  So I know you like juniors because you believe they have the greatest upside potential.  Well, okay.  We're going to get questions on this.  I know you can't mention names.  Any kind of hints you might want to throw out? 

JIM:  A couple.  My favorite areas are Yellowknife and the Sierra Madre, and I would be a buyer of companies in both regions.  In fact, one of our holdings in the Yellowknife area just got bought out this week, but these are my two favorite areas. [7:04]

JOHN:  There is always the issue of whether or not juniors are riskier than large cap producers as well. 

JIM:  Well, sure.  That's why you want to have a diversified portfolio of juniors.  You also in addition to diversification, John, I think a very important aspect that you need to have as an investor in this area if you're going into juniors is a good dose of patience – and I might add a cast iron stomach. 

I mean when juniors take off, they go up like a rocket ship.  It's not unusual to see juniors go up 10, 15, 20, 30%.  I've seen juniors go up 100% in a single day.  They take off like a rocket ship.  And those gains could be incredibly huge.  But you also have to be prepared for the down drafts and you're going to get them every single year.  And that's why you want to have a portfolio of juniors, not just one.  And if you don't know how to pick juniors, you're probably better off going into something like a gold mutual fund, where you're going to have majors, some intermediates and a large stable of juniors so you have diversification with them.  [8:09]

JOHN:  So the key here is obviously diversification.  It's that way with almost all investment.

JIM:  And especially if you're going into a higher risk category such as juniors.  But you know, equally important and I stress this over and over again, the most important trait that you have to have investing in juniors is patience.  Let's explain how juniors work.  Okay, they go out, they raise money in a public offering.  They may have staked a claim to a certain area.  What they are going to have to do is explore that area.  They might do some scoping studies, some trench work to just get a feel of where they need to drill; and then they start drilling on the property and that may take two or three years to drill a property.  Then they are going to have to take a look and develop a geological model and depending on where they are mining or what they are mining they are going to have to develop metallurgy.  So in other words, if they are going to do an open pit, or underground, how much ore are we going to get with each ton, what is the geological model telling us, what are the ore grades telling us, what are the best recovery techniques?  All of this goes into pre feasibility and then eventually feasibility because you're not just wanting to find the ounces, but you also want to know that you're going to be able to get the ounces out of the ground and when you do, they are going to become economic meaning that you're going to make a profit. 

And remember, juniors don't have any source of revenue.  They raise money and, yes, they put the money in the bank.  They may have some interest income to offset some of their costs, but they are always going to be having to tap the equity market and raise capital because it costs money.  They don't have revenues.  Remember they are poking holes in the ground and today your personnel costs are going up because it's hard to get qualified geologists because there is a shortage of them.  There are not enough geologists, both in the energy industry and also in the mining industry.  And I'll tell you, if somebody is wanting to plan a career or thinking of going to college and you want to make a great salary and have a secure job, I'll tell you, get into geology and become a geologist.  You're talking about job with oil companies that can be several hundred thousand dollars a year with perks.  You're talking about with mining companies, six figure income plus stock options.  I mean, John, the sky is the limit and there is just a basic shortage of personnel for the resource sector. 

But getting back to juniors, John, all of that is going to take time, and if you don't have a timeframe of three-to-five years minimum to be invested in something.  In other words, you are or need to be an investor when you're going into juniors as opposed to, let's say, trading in and out of a Newmont or a gold index fund or the gold ETF technical trading for the movements in and out of the gold market.  When you're in juniors, they are less liquid and you really have to hold them for the longer term.  And if they dip, then what you do is you buy more.  [11:15]

JOHN:  Before we go today, Jim, I guess there is one story which really gets stuck in the stuck-on-stupid category.  We have to talk about this one, and the stuck-on-stupid candidate of the week is…

JIM:  The state of Michigan.  The state of Michigan slaps a 6% tax on investment advice.  “Financial planners in Michigan were blindsided last week when the states legislature emerged from a late night budget session with a new 6% tax on investment advice.  Of course, the Financial Planning Association is protesting.  Michigan hopes it will generate $16.8 million of tax revenue next year.  The tax was imposed to help the home of the ailing auto industry offset the $1.75 billion budget deficit.  Also, in addition to the tax on investment advice, new taxes on 20 previously untaxed services ranging from lawn care to psychic readings to escort services are projected to generate more than 600 million a year once they kick in on December first.  In addition to the new service tax, Michigan's income tax rate was increased to 4.35% from 3.9.”  What do you think investment advisors are going to be doing in Michigan, John?  [12:33]

JOHN:  I would guess they are probably, especially considering the fact they can move right across the border to Ohio or the other attached states at least down by Detroit, I would probably suspect they are going to move rather rapidly.  So remember you talk about linear assumptions on the part of lawmakers that all things are equal. They’re not.  In this case they may vote with their feet.

JIM:  Yeah, if you look at their tax rate which they just raised it to 4.35 and then they add 6% tax on investment advisors, you're talking about a 10% tax.  I mean one planner said:  “I think the whole thing is just so damn typical of this state's government that I shouldn't be surprised, but it really bleeps me off said one planner who oversees $100 million.” 

This reminds me of the State of California.  I was doing television news.  This was 1990.  And in the recession of 1991, California raised income tax rates here from 9% to 11%.  So at a time when the economy was struggling, businesses were having a hard time, the economy was in a major recession, they raised tax rates.  And the state legislature commissioned the commerce department to study why businesses were leaving in droves.  And the head of the commerce department said, “save the money.  I can tell you, you idiots, it's taxes.”  I mean –

JOHN:  Only in California.

JIM:  Only in California.  “Duh,  I wonder why they are leaving?” And this is what happens.  And we're talking about here John in this state for small businesses, the governor is talking about charging small businesses 4% of their payroll to give to the state for health care.  So if you have a small business and they enact this, where do you think you're going to move your business?  [14:27]

JOHN:  Assuming you can move your business, but you're right.  You are going to go across the state line.

JIM:  Yeah.  That 91 tax increase plus workers compensation, I know here in California, Southern California and San Diego we were hit pretty hard because the largest employer in town General Dynamics, which employed over 16,000 people – not to mention the hundreds of thousands of jobs that were associated with its defense industry – they packed up and left.  They just said “that's it, we're gone, we're going to Tucson.”  And back then we were getting letters from governors of other states, Arizona, Nevada, “relocate here, we've got low taxes, we welcome you.”  And that’s the great thing about an open border that these idiots don't realize when they raise taxes on somebody.  It's, like, okay, one group is doing very well.  Let's penalize them and tax the heck out of them because another group isn’t doing as well.  As one guy said –and this is referring to the Michigan tax – they'll give tax rates to businesses that are clearly not growing and then tax the hell out of the only part of the economy that is growing: the service sector.  It makes absolutely no sense.  Absolutely no sense.  [15:42]

JOHN:  Yeah.  I would predict two things.  One, I think some state somewhere is going to incorporate an exit tax.  I still think that.  And we’ll see.  I'll put some money down on it here and say it’s a standing bet that sooner or later they'll say you can't do that, come back here, we're going to make you come back.  So the last income tax, the state will – the rate will be double or something like that.  It will be a real penalty.

JIM:  You know, California used to do that until they were challenged in the Supreme Court and they lost.  Let's say you worked in California for 20 years, 30 years and you retire.  Back in the early 90s and 80s, if you left the State of California and let's say you went to retire to Florida or Miami or someplace like that, California would tax your pension under the idea that you earned that pension while you were in California.  It's ours.  And they did that for a number of years.  I know a number of people that would relocate before they would retire but even then California would try to track them down.  But California eventually lost that in the Supreme Court.  But, you know, California tried to do that just exactly what you're talking about.  [16:45]

JOHN:  I noticed they had a thing on psychic counseling services.  You must admit that that's pretty close to financial advising.  Don't you think?  So I can see why they threw those two things in together too.  They are both related. 

JIM:  This is just – this is just crazy.  But, you know, these are the kind of times we live in. 

Believe it or not, John, they did pass a tax here in California, they raised the top tax rate to 10.3 and there was in the last political campaign the Democratic candidates wanted to raise the tax rate to 14%.  I guarantee you that they put that 14% tax rate, California's economy would have gone into a depression because you would have had businesses and individuals moving out in droves. 

This reminds me.  I can remember when I was in graduate school.  I was interviewing with the big New York banks and I remember the salary offers I got from a couple of the banks.  I took a look at them.  It was very attractive.  I lived in Phoenix at that time where everything was very cheap.  So, relatively speaking, the starting salary that was being offered was 7 or 8000 dollars, almost 30 something percent more than what I ended up – I ended up working for a company called Arthur Andersen.  I don't talk a lot about that today, but in terms of what I was offered from a Big 5 accounting firm at the time, but after I took a look at all of the tax rates of New York, the commuter tax and also the cost of living compared to where I was living at that time, which was Phoenix –  I mean, our first house in Phoenix we bought for a little over $60,000 –  I could afford to go to work and start a family and keep my wife at home with the kids because of the relatively inexpensive tax rates.  Phoenix had a low sales tax at that time, extremely low income tax and just the cost of everything was lower.  So taxes do factor in in terms of how people make decisions. 

And one of the problems that politicians have, they believe in static accounting.  So if we raise the tax rate and we have X amount of dollars of income in the economy, we'll just get that much more income.  But what they don't and can never understand is when you raise taxes, you get less revenue to the government because people take evasive action.  Similarly, when you lower taxes, look at how the budget deficit has been going down, tax revenue have been going up because lower taxes stimulates economic growth.  It's an argument that is – it's amazing how it applies.  You take a look at some of the moribund economies of Europe and what are they talking to revitalize their economy?  Lower taxes.  You can never tax your way to prosperity.  [19:39]

JOHN:  No such thing as a free lunch.  Somebody has to pay for it sooner or later.

JIM:  They never do. 

JOHN:  This is the Financial Sense Newshour at www.financialsense.com.  Coming up next on other voices Jim interviews John Williams from shadowstats.com. 

 Other Voices: John Williams, Shadow Government Statistics

JIM:  Hey, John. 

JOHN WILLIAMS:  Hello, Jim.  How are you doing? 

JIM:  I want to talk about these employment numbers, because – we got the number in August – we lost 4000 jobs and that sort of became the excuse for the Fed rate cut.

JOHN WILLIAMS:  Yeah. 

JIM:  Then we get the September numbers and we get these great hypothetical job numbers and then they revise the August numbers to a gain but then buried in the back pages is they also illuminated 297,000 jobs from March.

JOHN WILLIAMS:  Right. 

JIM:  And the other thing that really just, you know, if somebody looked at this and tried to make heads or tails out of it, how can you have five months of declining jobs in construction but construction wages are going up?

JOHN WILLIAMS:  No one ever said the numbers had to make any sense.  And it's been a long time since the employment statistics have made any sense.  You have to keep in mind that you're dealing with two surveys.  One the payroll; the other the household. 

The payroll counts the number of people who – the number of jobs that people have.  It may count the same person who holds two or three jobs in order to make ends meet. 

The other survey, the household survey in many ways is a statistically better survey.  They go around door to door.  They did about 60,000 doors in a period of a week and asked whether or not people were employed or unemployed and if they are unemployed if they are willing to work, able to work, things like that to find whether or not they should be counted among the employed.  That also counts the number of people that have at least one job. 

Now, you have different reasons for the numbers being different including the multiple job holders and such, but adjusting for all of the differences, you can't reconcile the two series to within a million jobs of each other.  And imagine that, you'll find a lot of things like this that maybe surprise people a little bit, but the markets rely too heavily on these statistics and their supposed accuracy, or at least Wall Street will tell you what the accuracy is. 

In reality, for the payroll survey, the one you're talking about, you're not looking at a statistically significant change in payrolls unless it goes beyond 129,000 jobs.  The 4000 job drop which we had back in August, that was plus or minus 129,000.  To the extent that we have any competence saying jobs went up and down, that 129,000 also covers the 89,000 that they now report as a gain.  And if these numbers were honestly reported, what we'd be arguing over are really random changes in statistically insignificant numbers.  It's not the type of thing that would move the markets.

If you go back to August, at that point in time, you had a Bureau of Labor Statistics which is part of the executive branch that knew very well that a 4000 jobs contraction would have a variety of impacts on the markets and the Federal Reserve.  And if you look at the talk at that time, it was not clear that Bernanke was going to back a Fed funds cut; possibly maybe even probably.  But it wasn't clear because the problem that Mr. Bernanke had then and still has today, is the dollar.  If he cuts too much, you'll see massive selling of the dollar, dumping of the dollar.  And when he cut 50 basis points that came pretty close to – came pretty close to triggering it.  You had some very heavy dollar selling, rumblings that the Saudis were going to drop their tie to the dollar and such.  But up to the point in time of that weak jobs number, it wasn't clear that was going to happen. 

What I'm about to tell you here is purely my speculation.  It's a deduction based on what I've seen with the numbers and what I know the Bureau of Labor Statistics can do with those numbers. Because given the margin of error, given that they change the seasonal factors of these numbers every month they can come up with any kind of a number that they want.  And when they know the impact – they are very politically sensitive or financial market sensitive time – of one number could be of such significance, I don't think that what gets reported is just a random statistical variation.  I think what happened is that someone in the Administration, perhaps Mr. Paulson, wasn't sure that Bernanke was fully on board for a rate cut which Wall Street wanted and so the numbers were fixed so you would get a weak enough payroll number to effectively force the Fed into a rate cut. 

The Fed did cut 50 basis points, which is more than the 25 basis points that they had, in fact already, if you look at where the Fed Funds rate was trading.  It was enough to rattle the markets, particularly the dollar, which I think is the Fed's primary concern.  Enough so that it began to trigger some very nasty effects; and we're now faced with a situation where – until you had this latest reporting of the employment numbers –that it was expected the Fed was still going to cut.  And that in turn was going to again exacerbate the problem with the dollar.  What happened?  Well, this time round all of a sudden you not only get jobs growth that's enough to take pressure off the Fed for easing, but a revision to the requirements number that has it back in territory that would never pressure the Fed into easing had it come out that way. 

And again, this is speculation on my part but I think we saw numbers that were managed there and I think we are still seeing numbers that are being managed – ranging from unusually strong retail sales to an overstated reduction in the monthly trade deficit.  All of these factors are being adjusted now to try to help the dollar, to try and stabilize the financial markets because it's a very cheap way of doing that type of thing without the Fed actually having to take any policy acts.  [26:30]

JIM:  So basically, John, what you're saying here is we’re getting political numbers each month, so the economic numbers because if you try to look at, for example, payrolls, you've got rising wages in the construction industry, but if you look at the jobs numbers every month, construction loses jobs five months in a row but wages are going up and you know that doesn't compute.

JOHN WILLIAMS:  That doesn't make any sense in the…and in terms of the annual benchmark revision which they did talk about, as you pointed out, they indicated that come March they would be revising last March’s payrolls downward by 297,000 jobs.  And so they've estimated there that, gee, we actually over stated employment by 297,000 back in March of 07.  And the way they revise these numbers they will take that trend and carry it through.  And right now, we're probably seeing numbers that are about 500,000 jobs higher than what they will be showing after the revision – that’s just the way it gets revised.  

But on top of that, where a lot of the problem comes with these numbers is with the bias factor that they add in every month, or occasionally subtract.  And that's gotten some press recently too.  But if you have a minute it might be worth just taking a quick look at that because that goes back to the recovery from the 1983 recession during the Reagan administration.  And the worse of all things happened for the Bureau of Labor Statistics:  They actually under estimated employment growth.  And if you’re a statistical agency for a political organization which the administration is, if you over state jobs growth or employment understate inflation, you're going to be forgiven but go the other way, you're in serious trouble.  And what they concluded coming out of that recession was that there had been a number of people who had started businesses on their own that were under the radar screen of the government, and that they just did not have a way of counting them.  so they put in a bias factor.  And every month they started adding something like 150,000 jobs – every month – on top of whatever else the numbers showed to account for this phenomena.

Well, business cycles came and went and the funny thing was whenever they had a recession, they didn't take adjust the bias factor, reduce it or even turn it negative which might have happened.  But since it was just a plugged number they decided to dignify it and give it some statistical meaning and such.  They changed the name from a bias factor to a net-birth model and then they came up with estimates of how much it should be by month and by industry.  And right now, it's spread over the year, it varies month by month, but it adds roughly 1.2 million jobs per year out of thin air because they think they are missing it.  Again, in a recession, which they think we're in now, that bias probably disappears – if not turns the other way.  So you're probably getting close to over a million jobs extra per year being added in right now.  And 15,000 jobs a month are added in for the construction trade month after month regardless of what's happening in the construction industry. So what you’re seeing in the construction industry is net of the upside bias factors that they are adding in there.  [29:57]

JIM:  John, do you think this is one reason that businesses have been so reluctant to expand, build new plant and equipment because the economic numbers they are reading on the economy, the inflation rate, and productivity numbers even the unemployment rate, a lot of this stuff don’t add up to what they are experiencing?

JOHN WILLIAMS:  I guess that would be part of it.  I think that what you're hitting upon is really they don't trust the numbers.  Their own personal experience, business experience is telling them that the business is just not there.  And the personal experience of individuals and corporations overtime has generally been a much better barometer of what's happening than anything the government publishes.  So, yes, I would say it’s really a function of not believing the numbers and believing rather what you're seeing with your own orders, what your customers are telling you, what your sales people are telling you.  [31:09]

JIM:  It's absolutely amazing.  I mean the day you and I are talking on a Friday the PPI numbers come out, they are up 1.1%.  They are up year-over-year 4.6% or something like that.  And yet

the spin on the numbers when they came out is not that were annualized over 12% it's that the core rate was one-tenth of a percent.

JOHN WILLIAMS:  That's such nonsense.  I do think people are beginning to realize that it is nonsense.  The whole idea of the core rate of inflation as it was initially conceived was to maybe give an alternate way of looking at the CPI numbers.  When you had a real rough month because of energy costs or food costs it was designed for looking at the numbers over a month or two.  Nothing more than that.  Because actual inflation is had in energy and food – the items that they exclude from the core rate of inflation. 

But then you had people like Mr. Greenspan and Mr. Bernanke who are trying to sell the concept that inflation is under control, that it's really quite low.  And I guess if I were trying to say hey, there is no inflation I'd look for all of the measures of inflation out there and see which one I could find that is actually the lowest.  And if you take one that has energy and food removed from it, which is a major part of most people's consumption, most corporations at least from the energy standpoint, and you add into it something you call a substitution bias where you're looking for where people substitute less expensive goods for more expensive goods, you'll end up with a core inflation rate –net of food and energy – and one that measures the substitution effect which would be the personal consumption expenditure.  And amazingly enough that is the prime inflation measure that the Fed looks at to say “hey, things are out of their control.”  But that has nothing to do with the real world. 

In the real world people do consume food and energy and when you’re looking at inflation, your concern is not, gee, what happens, if steaks are going up in price here and my hamburger, all of a sudden my cost of living is not going to be so bad.  That's not the way people look at it.  They look at it from the standpoint of what do I need to maintain a constant standard of living.  I bought steak last year, and I want to buy steak last year, and how much more do I have to make this year than last year to do that?  That is the way the Consumer Price Index which gets reported next week has traditionally been viewed.  But as they are changing it now, it’s no longer aimed at being a cost of living  of a constant standard of living but rather cost of living of a declining standard of living.  That’s again, nothing more than a cheap propaganda out of the Fed and Wall Street aimed at trying to buffalo the American people.  And the average guy doesn’t buy it because he knows what he's paying.  He knows whether or not he's making it with his paycheck.  It's that simple.  If people don't believe the government's numbers there's probably a good reason to believe there is a problem with the government's numbers.  [34:01]

JIM:  John, this is so reminiscent to me having gone through the 70s where the government just absolutely lost credibility from its policies when inflation was running double digits, which you know, we're probably not too far away from that when you consider the under reporting.  And speaking of that, given the under reporting of inflation, do you think we'll ever really see a recession in nominal numbers?

JOHN WILLIAMS:  In nominal numbers?

JIM:  Yeah. 

JOHN WILLIAMS:  It has happened.  In fact, you did have that in the Great Depression where you had a deflation along with a declining economic activity so that the nominal numbers were actually worse than the real numbers, the inflation adjusted numbers. 

But the way government has adjusted things these days it becomes very difficult to show a recession the way it used to be shown in the numbers.  In fact, for the most recent revisions in the last couple of years they’ve revised away the recession that took place in 2000 in the official government statistics.  You have a couple of contracting GDP quarters but nothing there that's a consecutive quarter to quarter.  On the other hand, with all of the gimmicking, it’s just a matter of severity. If you get a downturn that is deep enough, it will show even given the current games they are playing with the statistics.  And yes, I think the downturn we're in now will eventually be deep enough that it will show even in the gimmicked statistics.  [35:56]

JIM:  I tell you, it's good to see services like yours, John, that report a lot of these discrepancies because I think a lot of people are waking up to the fact that a lot of the numbers that we see on a day-to-day basis just simply don't add up anymore. 

John, as we close, if our listeners would like too find out more about your newsletter and the work that you do, how could they do so?

JOHN WILLIAMS:  All they have to do is go to our website which is www.shadowstats.com and what they will find there will be a series of articles available to anyone that gives background on the key economic statistics, how they've been reported and gimmicked overtime.  There is a page there that will show what we estimate the current CPI, GDP and such are.  We also track M3 on an ongoing basis which the government no longer reports.  That’s soaring now, it’s up to over 14 ½ % year to year.

JIM:  No wonder they got rid of it.

JOHN WILLIAMS:  Yup, absolutely.  In the archives we publish the newsletter and make available to the public the newsletter that we published more than six months ago.  Of course any one who would like the current writing is welcome to subscribe.  We always enjoy having new subscribers but there is a lot there for any one to look at it and give you a pretty good sense of what's going on. [37:00]

JIM:  The website once again, John?

JOHN WILLIAMS:  It’s www.shadowstats.com.

JIM:  Thanks for joining us on the Financial Sense Newshour.  Always a pleasure to talk with you.  Please come back and visit us.

JOHN:  Thank you.  [37:09]

 Q-Calls

JOHN: You’re listening to the Financial Sense Newshour at www.financialsense.com.  That’s making sense of something rather than –  some people think it's dollars and cents, Jim.  Also if you'd like to check on investing with Jim, it's www.Puplava.com.  That’s “pup” and “lava” – puppy and lava.  Just think of throwing a puppy into lava. 

JIM:  Cruel!  You better not let the PETA people hear this.

JOHN:  I don’t know, lava puppy on pita bread? Not bad. 

The Q-line is open 24 hours a day for your calls 1(800)794-6480.  That is toll free from the US and Canada, although, now that Canada is not accepting American dollars across the border we'll think twice about that. But for now it's toll free anyway.  And the number does work from the rest of the world, but anywhere outside of the us and Canada, you have to pay whatever your standard international rates are for that particular call.  Please remember that radio show content is for informational and educational purposes only.  You should not consider it a solicitation or offer purchase or sell securities.  And responses to your inquiries on the Q-line, which we ask you to keep short, please, are answered based on the personal opinions of Jim Puplava and they don't take into account, your suitability, objectives or risk tolerance.  It’s sort of a generic answer because we don't know enough about you to give you a very specific answer.  And as such, Financial Sense is not liable for any financial losses that result from investing in any companies profiled here on the program or anything else that we profile. 

All right.  First call is from Canada, as a matter of fact.

Hi, Jim and John , this is Bill from Ontario, Canada.  I had a question regarding the Canadian Central Fund which you've talked about several times.  I've purchased it two or three times in the last since April and I’ve been looking at my numbers and looking at the charts, especially the last three months both gold and silver have risen a good deal and the fund is just getting along very flat.  I sent them notes asking them the reason why and they responded that it had nothing to do with the Canadian dollar.  I thought it was the Canadian dollar strength.  They indicated it was more to do with the number of shares issued in the market, how many buyers and sellers there were.  I understand buyers and sellers but with gold and silver both rocketing up in the past couple of months I'm a bit baffled as to why the fund seems to be just flat.  I'd appreciate your answer on that.  Thanks.  Keep up the good work.  I love the program.

JIM:  You know, Bill, I'm just looking at a chart and with gold bottoming in August, the Central Fund got down to – it got down to a low of $8.95 and that was roughly on August 16^th.  But you know, from that point forward it went from 8.95 to the close on this Friday of 10 percent.  So, you know, it's keeping up