The
BIG Picture Transcript
November 17,
2007
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Part
1
The
Return of Headline Inflation
Behind
the Numbers: What they never tell you on cable
Capital
Controls / Dollar Devaluation Where will those dollars go?
Part
2
They
Still Don't Get It
Other
Voices: Matthew Simmons, Chairman, Simmons & Company Int'l
Other
Voices: Bill Murphy, Chairman, Gold Anti-Trust Action Committee (GATA)
Q-Calls
The
Return of Headline Inflation
JOHN: Welcome back to the Financial Sense Newshour, and this is the part of the program which we call the Big Picture in which we try to connect the dots and project the trends – remembering that, of course, the herd is almost always running in the wrong direction and the media are looking in the rear view mirror – to find out where they are going.
Speaking of all of this, Jim, remember a number of years ago you wrote a piece called The Great Inflation and that was back in 2004 when virtually everybody on the street was worried about deflation because that's the way the herd was running. When you said it's going to be inflation you took a lot of flak over that piece. But now it looks like it's playing out according to the script. Which I guess is always a great “hold your breath moment” there when you finally say, “hey, it's playing out, this sort of forms a catharsis: I was right.” It's responding in the direction of what we've been talking about here, the perfect financial storm and what it would look like. And in the Storm series, which is still available on the website, you outlined multiple scenarios, deflation, stagflation, inflation or hyperinflation.
JIM: You know when I wrote the Perfect Storm series starting in the summer of 2000, I finished it in October of 2001, I really didn't know, John, how this was going to play out. After I finished the Storm series I spent about two or three years reading and studying everything I could to understand about how inflations and deflations come about. And in the summer of 2004, I experienced an epiphany that summer; and that's when I wrote The Great Inflation in the fall that year. And then, of course, about a year later, I wrote The Two Bens and that was the result of all of that study. And I became convinced at that time that it was definitely going to be inflation. [1:56]
JOHN: I know in order to do that I remember you read a lot of history and economic books. What had more influence over your thoughts in that area? Obviously you can read all of the history books you want, but it's more of your philosophy and your organizing ideas – almost your economic weltanschauung, your world view – that's going to determine how you put things together.
JIM: Well, I approach economics from the Austrian school, so I had a firm foundation on what causes inflation. And it always is a monetary event. But I also wanted to study how inflations played out throughout history and for example, why deflation takes hold in one era, for example the US in the 1930s, or Japan of the 1990s. But I was also looking for patterns in the past.
There were a number of books that sort of altered my thinking. We've talked about them here on the program over the last couple of years. Some of the books that we had on inflation that stand out were: Bresciani-Turroni’s book; Jens O. Parsson’s –who we've often quoted here – and his book Dying of Money; and Adam Fergusson's book When Money Dies; and also William Guttmann. But a couple of other books from a historical perspective were David Hackett Fisher and Rothbard which kind of stood out and influenced a lot of the conclusions I drew from the studies I made. [3:20]
JOHN: Were there any patterns that you discovered in the midst of this?
JIM: Yeah, there really were. David Hackett Fisher, an historian, did a great job putting inflation patterns together. And here's the remarkable thing, John, when you look at history: all great inflations have important qualities in common. They all share sort of a wave-like pattern according to Fisher, much like bull markets and bear markets. You know if you look at charts, they have a pattern that stands out. They have the same sequence of development, the same pattern of price relation, similar movements in for example wages, rents, interest rates. And they all have the same dangerous volatilities in the latter stages such as we are seeing today.
And here's the remarkable thing. All of these major price revolutions in modern history really began in periods of prosperity. Think of the 1990s or the 1980s. Each of them ended in shattering world crises. Think of Germany in the 20s and 30s, the US in the 20s and 30s. [4:28]
JOHN: Yeah. I can even think of the Falklands War. Remember that? Argentina was having severe economic problems and the military government there decided to start a war with Great Britain over what they called the, “Islas Malvinas,” the Falkland islands and everything.
Why do you think we're condemned to repeat this? If the pattern is so clear and you can look back in history, how is it that politicians...I don't even know why I'm asking this question having watched the debate last night. It happens over and over again with incredible reliability.
JIM: Something that Fisher talked about in his book when he wrote:
What happens in the future is contingent [and this is key] on the choices in the present, which derive from our memory of the past.
So if we've had a period of benign inflation over the past two decades people tend to think of it that way. And this is why I think we've been lulled into complacency is the inflation in the Greenspan area – and Greenspan really was an inflationist – occurred mainly in paper assets. We got these asset bubbles in the market or in this decade we got them in real estate. However, we've now arrived at a point, as a result of Greenspan's inflationary policies, at what I call the end game. And when you think about it, Bernanke is now in charge of bringing it to completion. [5:55]
JOHN: Okay. Let's talk about price patterns and the clues to this whole thing.
JIM: It's amazing. There are some common features. One of them that stands out is population growth. And if you think it logically, when population increases, what comes with that? Well, you have more people on the planet; that means people need to have more food, you burn and consume more energy, there is more demand for housing and land. Demand for life's necessities expands more rapidly than supply can increase and inexorably prices rise; and this is facilitated by money growth. And just think of China and India today; and think of what we're seeing first in energy, now what we're seeing in food. And I think also below the radar screen, which is also becoming a major problem, is water. [6:42]
JOHN: Which is one of the chief ironies of the whole thing because when you look at the fact that energy and food are the two things that any family anywhere on the planet is most principally concerned with, those prices are rising. But then we back them out of our price indices and dismiss them as being unimportant. It's almost a cruel joke in the midst of this whole indexing of inflation.
JIM: Absolutely, because when you study inflations through out history, rising energy and food prices are a warning of what is coming. Whenever food and fuel prices rise together overall inflation soon increases sharply. And historically, the most rapid rises appear first in the price of energy. And just think going back to 2001 when oil was at 18 to $20 a barrel and then it was 30 and then it was 40, then it was 50, and then it went from 50, jumped to 70 with Katrina and Rita, came back down into the 60s, went back up into the 70s, came back down in the beginning of the year; and look where we are today on this Friday, we're talking about $95 oil. So the most rapid rise appears first in the prices of energy. That's followed by food and shelter and raw materials. And these are the items that are most heavily in demand during a period of population growth. And the most visible sign of this is the rapid rise in the price of energy.
And Fisher documents a lot of this in the various inflations throughout history. One of them which he talked about in his book was in the 13th and 14th century. We had a great wave of inflation that hit the planet at that time. During that time [the inflation in] the source of energy is what happened to the rise in the price of fire wood and charcoal. So in each one of these eras of inflation, these common characteristics are present in all of them. And in every single case it begins with energy, goes to food, shelter and then carries over into the rest of the economic system. [8:54]
JOHN: What follows after that anyway? So assuming that it starts with energy –because you can see where energy sort of drives everything in a culture, at least especially in modern culture. And so as it rises everything else is going to be forced to rise upwards with it.
JIM: You need energy to do anything. If you want to produce something, whether it's food or manufacturing widgets, you use energy. So as that price rises, then what follows is the price of food [rises] because it takes energy to produce food. It takes the fertilizer that comes from natural gas, the diesel fuel that's burned in a tractor or in a combine when you're harvesting. Then the products are stored. That takes energy to store them. They are put on trucks and then they are sent to manufacturing plants where the food is processed. Then they become finished food products, put on a truck, they get to the store where they are refrigerated. So energy is involved in all of that process. But what follows after energy is a rise in food and that's exactly what we're seeing today. I don't care whether you're looking at any kind of food category, grains, meats, dairy products that's what we're beginning to see now. [10:07]
JOHN: You know, there's a monetary side to this whole equation that interacts with what you're talking about in the commodity side.
JIM: Sure, because it feeds into it and it enables the price rises. As demand for goods increases, their price goes up, money comes in there, and governments create more money. And especially if you take a look at historical patterns with increased trade –or today, globalization and the fiat monetary system that we now operate in – there is a lot more money that's in circulation. And just think of MZM, which is growing at over 20%; M3 in the US, which is growing at close to 15%. This added monetary inflation when added to demand inflation causes prices to keep rising. It also increases the velocity of money and circulation.
And along with that increased velocity comes increased volatility, which is exactly what you're seeing today. I mean just look at the selloff on Monday, the rebound on Tuesday, the selloff the next day. So one of the things that come in in the latter stages or the terminal stages of inflation, is not only increased velocity but also increased volatility. And we're already beginning to see that right now. That's one more indicator of the phase we're in right now. [11:30]
JOHN: Strangely enough, that reminds me of a process that builds a thunderstorm. As long as there is an adequate supply of water, which in this case would be flooding money, the process begins self-fueling and actually reinforces itself and keeps ongoing.
JIM: This is now what is coming into play. You're seeing high prices increase demand for money. When demand is met by increasing supplies of money as we're seeing today, you begin to see a growing increase in money velocity and prices are driven even higher. We're about to enter this next stage in my opinion where velocity begins to increase. And that's why the Fed pays so much attention to that Inflation Expectation Index. Think of that Inflation Expectation Index as an index I call maybe the velocity index. Because when people believe that inflation is going to increase more in the future, then you start to see an increase in turn-over. In other words, why hold on to cash: “I'd better buy something now because it's only going to cost me a lot more in the future.” And so you see hoarding and you see money turn over.
And that’s why the Fed talks so much about it. In many of the Bernanke speeches before Congress, you always see the Fed Chairman making reference to this index. [12:55]
JOHN: You know, we always hear the talk about social inequalities. A lot of times you hear it in terms of the income tax meaning why we have to have a progressive income tax because that's supposedly more fair. But we find in this time of inflation there’s one very fixed phenomenon that seems to occur. The rich always get richer, the poor get poorer and there is sort of a split in the middle class. Most of the middle class go over the edge into poverty. As the cliff is crumbling under them, a few manage to scramble back to firm ground and go up with it to actually survive. But generally, the middle class is the one that disappears in the midst of the of all of this. Why is that?
JIM: Well, just take a look at it. As inflation increases in the system, let's say you're a middle class family. That means the basic necessaries of life – food, energy, services, education, visits to doctors – all of those costs start to go up. But think about your job. Unless you get a promotion where you get a major salary increase, most people are going to get a cost of living increase at the end of the year. Well, if we have a CPI index that is grossly understated and inflation is running at 10%, but we're reporting the CPI at 3%, you're going to get a 3% cost of living increase. That's probably going to put you in a higher tax bracket so you even get to keep less of that increase. And it's taxes and inflation that are going to eat up most of your purchasing power; and you're just having to run harder to make ends meet.
Whereas if you have discretionary income or you have an asset base you can always make investments that profit from inflation. You can go into gold or you can go into energy. But you have the ability to profit from an inflationary increase whereas most people that are working, salaried people, get hit with taxes and inflation.
I think back to the time when I was growing up. I come from a large family: ten kids – five boys, five girls. My dad was just basically a cabinet maker and he supported a family; my mom stayed at home and they even had enough extra income where they could make investments in real estate. That's because the dollar had a solid backing and we weren't inflating the currency the way we're doing it today. If my dad was to start a family today given his profession, having ten kids, there is no way my mother would have been able to stay at home and raise 10 kids. I mean you look at most families today; it takes a husband, a wife both working – and that's what happened as a result of the 70s when we abandoned the gold backing of the dollar and governments were allowed to inflate at will. That’s because there was no longer any incentive to balance to balance the budget and there was no restraint placed on government and its ability to inflate.
So what happened? The wife went to work in the 70s. In the 80s our savings rates began to decline. People saved less. That was one way they were making ends meet. In the 90s, not only did they stop saving, but basically people were making money with the inflation in the paper assets. And in this decade, not only did it take two spouses and no savings but people substituted debt. So this just goes to show you that progression of an inflation as it works its way through the system with increasing inflation and taxation. [16:33]
JOHN: Well, obviously when this pops up on the radar, the middle class becomes aware that something is going definitely wrong. They find it harder and harder to make ends meet. I interviewed a lady recently who used to be with the Treasury Department who has done a book on how the middle class can budget more; they can do this percentage for this and this percentage for that. I finally asked her a question. I said okay, you've got this middle class family, they make, for example, $5,000 a month, but they need $6000. I said what do they do now? She was absolutely silent. I said, “See! that's what they are facing.” Your little book is nice and cute, I told her, but it doesn't do anything for the middle class; right? That's where they are stuck in there.
Now, the second part of this problem is this is a government-caused phenomenon, even assuming in our country where the Fed is a private banking system, but it still operates under the auspices of Congress. Let's face it. And as a result of that and the politicians who (once people begin to get upset about this) are not willing to take the rap for having caused it in the first place. So the people, not understanding inflation, turn to the politicians and say, “Do something!” And then the politicians come in and they promise them all sorts of goodies and candies which can only be paid for by higher taxes or more inflation. They actually fuel the cycle, as it goes around the loop. [17:53]
JIM: And you know, this creates all kinds of social inequalities and you're seeing this today. A growing gap between, for example, the returns to labor and capital. And with it, you're seeing this rapid growth of inequality as a consequence. And John, this begins to appear in the latter stages of every long inflation in history.
Just look at the political parties today and especially this election cycle. The candidates are making even bigger promises to the voters, government health care, free college, savings accounts of up to $5000; and it's all going to be promised by taxing somebody else. Here we get to the free lunch concept.
The tragedy and it really is one, is that all of these promises are going to come at a huge cost to the majority of the population. And that cost is going to be the demise of the dollar and its purchasing power, the end of much of our freedoms, poverty for the bulk of the population and hyperinflation. You're also going to see an increase in incivility within society – and you're already beginning to see that right now whether you're looking at politicians or society in general. You're also going to see respect for the law diminish, and a major increase in criminal violence. Just turn on the evening news and you're already seeing much of that. [19:23]
JOHN: So sort of as a review here, much of the patterns that we're speaking of right now, historically can be found again. We say that history doesn't repeat but it does rhyme – we're pretty close to rhyming right here. It seems to go down this whole trail. First of all we see rising energy, because rising energy affects everything in the culture. Then that's followed by rising food prices. These are life's necessities and the middle class can't do anything about it. They have to pay those, period. That's all there is to it. They have to get around; They have to heat their homes, they have to eat, etc. People don't understand it, they turn to government to say, “help us, oh great government,” oblivious to the fact that government created the problem in the first place. And the politicians come in with all sorts of promises of a free lunch. But the problem is that somebody has to be to blame for the rising energy prices, the rising food prices. So now the blame game, or what you and I call off-loading, begins. And that's already under way.
JIM: Sure. And we saw that as energy prices went up. It was the oil companies. You're hearing a lot of talk in this election cycle: It's rich folks, from hedge funds managers; It's OPEC. They never mention one reason for food prices rising is because of a government mandate to use corn ethanol which has removed 25% of our corn production and diverted it into ethanol production, which is totally inefficient. But you're right. The government never owns up to the consequences of its decisions and especially its inflation policy. They always look for someone else. And you can see this when the Fed Chairman is up there, they talk about there could be some inflation coming into the future because energy prices are rising. See, right there, they are off loading it on to – “it's not what we're doing, it's rising energy prices.” Or they'll look for some group to off load the inflation cause on to. And this gets more towards the terminal stage of inflation when they are talking about businesses raising their prices so people begin to think, “oh, it's not inflation, it's these greedy business people raising prices that's causing inflation.”
So they always have to find somebody to off-load it on and there are very, very few people in Washington that really understand this. Ron Paul is probably one of the few that understands this. That's why he chastised the Fed Chairman last week to sort of put this in perspective. We played this clip last week, but let's play these back to back. Play that clip of Ron Paul talking to the Fed that we have an inflation problem and your remedy is to treat it with even more inflation. And then play on the back of that Steve Liesman’s comment that Ron Paul's economics leave something to desire. Steve is someone who believes everything he reads. [22:14]
RON PAUL: What is the advice that you generally get? And that is inflate the currency. They don't say inflate the currency. They don't say debase the currency. They don't say devalue the currency. They don't say cheat the people who are saved. They say lower the interest rates. But they never ask you and I don't hear you say too often – the only way I can lower interest rates is I have to create more money. I have to lower the discount rate. I have to make it generous, I have to increase reserves. I have to lower the interest rates and fix the interest rates, overnight rates, and the only way you can do this is by increasing the money supply. And I see this as the problem that we don't want to talk about. Currently of course, we can't follow money supply with M3, but we can follow one of your statistics which is MZM, the ready cash available, and we see that inflation is alive and well. It's – that money supply figure is going up about 20%. And bubbles occur when we have this malinvestment and the creation of new money. So my question boils down to this: How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money with more inflation? [23:31]
JOHN: Now, that was the interchange between Ron Paul and Ben Bernanke. As soon as they came out of that, then you had Steve Liesman at CNBC saying the following. This is a must here as well:
STEVE LIESMAN: I mean Ron Paul's economics really leave a lot to be desired. He talks about people having their savings wiped out because the dollar devalued. I think Ben Bernanke, the Fed Chairman, correctly points out that it is due to devalue if all of your saving...if you're spending all of your money abroad, that it's domestic prices that matter. I also think that Rick is wrong. I think Ben Bernanke has been very consistent about the impact of the weaker dollar on the US economy. There is a portion of it where prices increase because of imports. Also export prices can adjust to reflect those higher import prices and be higher. There are impacts throughout the economy but they are not decisive for the US economy on inflation.
JOHN: Yeah, put him in the DNC. I don't mean Democratic National Committee. That is “does not have a clue” category on this whole thing, because Ron Paul had very carefully targeted what is the cause of inflation and that is we keep inflating the money supply. The problem stops as soon as they stop inflating. But they won't do that because there are other ramifications entangled in that. But, you know, there is that difference in philosophy we always talk about: The difference between Keynesianism and sort of the Austrian view. And if you're raised in a Keynesian school, you view the solutions as being more and more tinkering; inflation is not caused by monetary increase in the supply.
JIM: You're absolutely right, John, because if you go to a government school and even a private school today, you are taught Keynesian economics. So when you see rising prices, which are the symptoms of inflation rather than the cause, everybody talks about treating the symptoms. And it's always more tinkering as you pointed out. But here is the problem. Every professor at a university is a Keynesian, so people go to school, they are taught Keynesian economics. They go out, get a job, they go to work in government which reinforces the view that hey, you got a problem, that means more tinkering by the government. And Wall Street is pretty much the same view too: “You got a credit crisis, give us more money. You got a problem in the economy, give us more money.” And they never talk about the root of the problem, which is money creation itself. And there is only two colleges, I think...
JOHN: Hillsdale.
JIM: Hillsdale and Auburn University that teach Austrian economics. I mean let's say you graduated from Auburn University or Hillsdale, you've got your PhD and you're an Austrian economist. John, you're going to have a hard time getting a job at a university. They just don't tolerate that. So unfortunately, when everybody is brainwashed with this kind of thinking that's what happens. You have a crisis and what do you hear from Wall Street? What do you hear from government? “We've got to tinker, we need more money.” [26:15]
JOHN: You know, by excluding food and energy from the inflation reports with the media either in total ignorance or collusion –you have to figure out which way that's going – and they are always talking about the symptoms, if you notice that: “ Inflation is really the rise of prices rather than the increase in the money supply.” This is really a losing battle because unless you can explain to the public what the problem is, they don't understand, so they keep opting for the wrong solutions which is usually to appeal to their Congress critters who then just start another round of tax and inflation and regulation and promising free lunches, which by the way nobody ever seems to notice they really don't deliver on. They are delivering less and less and now if you listen to the presidential debates they are promising things that they just can't even deal with. That's the systemic issue, right, out there.
Personally, though, once you realize the system now is almost on a free run of its own, it's not coming back. At least personally, I would think you could understand what is going on and do what you can to prepare. If you understand the mechanisms you can make certain strategic moves with your job, with what you're doing, understanding how these patterns are historically, what jobs will survive, what won't; what incomes will survive, what won't; where going to protect your money.
Well, I'll be honest with you. It's going to be a little dicey out there. Look at the bail outs, as a matter of fact, you were talking about recently. Look at the bail outs that Bill Gross wants; more government intervention to bail out the mortgage and credit mess. Investors need to protect themselves. Everybody wants the central core government to bail them out of stuff which they have no risk encountering. And they off load the risk of that to the people who never stood to gain from it. [27:53]
JIM: So as the system gets terminal, John, and that's what we're in, we're in the terminal stage. When you see the money supply exploding globally and it's not just here, it's a point that I differ with some of my fellow peers, this is not just a US phenomenon, it is global. And you see the demand for food, water, energy exploding at the same time, supply is struggling to keep up or it's actually shrinking. The world is inflation bound and especially after decades of disinflation, which are lower rates of inflation – basically the 80s and 90s, most of the inflation went into paper assets. So what I think you're seeing and you're going to see it going forward: Inflation is going to return with a vengeance. And where we're at today is a major turning point or an inflection point in economic history. All of this is going to benefit resource stocks from energy, precious metals, food and water. I mean just look at the performance of the sector over the last five or six years. It's also going to benefit companies that can facilitate supply and build the energy super structure; the same thing with food and water. And of course as prices rise and money dies and loses its value, the value of precious metals is going to sky rocket. [29:17]
JOHN: And you're listening to the Financial Sense Newshour at www.financialsense.com. By the way, we would like to get your opinion on something. That means you, persons who are living, if you go to our website at www.financialsense.com, there is a Financial Sense redesign survey. We're trying to redesign the website and we'd like some input from you as to what you think we ought to do with it. These are little things you check off in boxes, it's pretty easy to do. Jim, do we list body parts and family members like that as well so we can check those off?
JIM: No. That's excluded from the survey. But what we're going to do is we're going to redesign the site, we're going to add more content. We have some ideas internally, we're really going to bring a lot of research and information. But what we want to do is put your input to it because we have ideas in our mind, this is the kind of information that people need to know about, these are the charts, these are the tables, these are the stories, this is stuff people really need to follow. So those are some of our own ideas. But what we'd like to do is hear from you, and if there is something in particular you don't see on the survey, just email us and say, “Hey, Jim, I wish you guys could cover this or add this kind of content or I'd like to see this.” And if we see a lot of demand for something, that gets our attention and we'll try to incorporate that into the redesign. [30:41]
JOHN: And if you'd like to find out about investing with the PFS Group, go to our main website www.financialsense.com, and click on the area About Us and there is a lot of information there. Financial Sense Newshour with Jim Puplava and John Loeffler will be back in just a moment.
Fed Chairman, Bernanke: All right. All right. Order everybody. Meeting of the open market committee for this quarter will please come to order, please. Hope you're taking minutes over here, madam. Thank you very much. First item of business, as you all know, we've been getting some flak about not having transparency in these meetings, so we're going to take this little token photo here to release to the press. That should take care of the transparency kooks.
Fed Governor: Hey, Ben, isn't that a little risky though?
Bernanke: Nah. We don't think so. Okay, everybody, smile and say dollars.
All: Dollars.
Fed Governor: Gold.
Bernanke: I heard that. That wasn't funny.
Fed Governor: Sorry.
Bernanke: Now, onto the business of raising interest rates. Madam Pecunia, how are you doing?
Mdm. Pecunia: I'm looking deeply into the M3 money supply.
Bernanke: We don't talk about that anymore. It doesn't exist.
Mdm. Pecunia: But I can still see the M3 aura on the economy.
Bernanke: Look, Madam Pecunia, just tell us: Should we raise the interest rates or lower them?
Mdm. Pecunia: I see interest rates going up and I see interest rates going down.
Bernanke: Oh, good. That tells us a lot. So which one is it?
Mdm. Pecunia: What? Do you think I'm a psychic.
Bernanke: Well, keep trying.
Michael, how are you doing?
Michael: Two snakes and a six.
Bernanke: Why don't you just flip a coin?
Bernanke: I don't have coins anymore.
Bernanke: Why not?
Michael: The metal is worth more than coins now, so that's only for scrap.
Bernanke: Great. Does anybody else know about this?
All: Nah.
Bernanke: Well, keep it that way. Look, everybody, I told Congress that we're data dependent, and dog gonnit, we're going to come up with some data.
Bernanke: Excuse me.
Fed Governor: How did you get in here?
Baby boomer: I'm a baby bloomer and I was wondering if you guys could arrange it so we can stop inflating the dollar so we can retire with our Social Security and pensions at full value and not have our golden years wrecked by your overinflated dollars?
All: [raucous laughter]
Baby boomer: Sorry.
Fed Governor: Hey. There is a microphone at the bottom of my coffee cup.
Fed Governor: Yeah. Mine too.
Behind
the Numbers: What they never tell you on cable
JOHN: One of the comments we quite frequently hear coming from the Fed, I guess, notably Ben Bernanke, prior to that Alan Greenspan, is that they are data dependent. And the markets seem to live and hang on every economic number that comes out. Is the economy okay or are we heading toward a recession? And probably it even depends, Jim, from whose point of view, the middle class or those people who are having fun throwing all of the paper around on Wall Street. The economic reports are supposed to answer these questions, but that doesn't seem to be what's actually happening. So what's going on out there?
JIM: Any kind of economic number you look at today – GDP, CPI, unemployment numbers or other economic reports – they are either over or understated; or there isn't much depth to a lot of these reports in the analysis that you see on. Let's say if you're on the cable channels, the numbers come out and they'll say, “a lot of jobs created.” And they don't talk about the birth-death model, they don't talk about the personal household survey which is diverging from the headline survey. So it's like there is a bias there. There is a number, “Ah! that's a number, okay, we can sell that number.” So they are always trying to sell something rather than dig deep into the numbers and tell you this is really what this number means; or this is when you look closer on the surface, the number looks good, but the closer you look, it doesn't look as good. [34:22]
JOHN: Okay. That sounds good in theory. Let's go to some examples so we concretize this in people's minds.
JIM: Okay. Let's begin with the job numbers, which is the mother of all economic reports. It's supposed to tell you how well the economy is doing. If the economy is growing then you would expect to see a lot of job increases. And if you look at the headline number, it tells us the economy is very strong with 160,000 hypothetical jobs that were created last month. But another survey, the Household Survey shows a loss of jobs at 250,000, so the Household Survey is probably closer to the truth in terms of what's actually happening in the real economy. I mean Chrysler is laying off 10,000 workers and look what's happening to the financial industry, the real estate industry, the mortgage industry, the banking industry, the brokerage industry, if you take a look at the credit derivatives department and training departments at a lot of the major brokerage firms, a lot of these people are getting laid off. They are getting laid off in the financial intermediary industry, they are getting laid off in the construction industry. So a lot of the numbers that we report just don't seem to add up with what you’re actually seeing in the real economy. [35:36]
JOHN: Okay. So by household survey, I'm assuming that you're saying that they actually dial up. So you have a polling group call up and call X number of households to see how things are doing and they just talk to people in the households; right?
JIM: Yeah.
JOHN: Okay.
JIM: That's probably going to give you more accurate input in terms of “okay, here is our model and theoretically the birth-death model all of these small businesses which we can't poll should be creating all of these hypothetical jobs. [36:01]
JOHN: So this is what I call a wet finger analysis. They just wet their fingers, stick it up in the air. You mean the birth-death model doesn't go around and count noses?
JIM: No.
JOHN: Okay.
JIM: It's an interesting comparison because usually when you come out of recession, the birth-death model tends to understate the amount of jobs. The Household Survey tends to lead coming out of a recession. Then when you get towards the tail end of an economic boom what happens is those two surveys tend to reverse themselves because statistically what statisticians are now doing is they are taking a look at the growth in jobs that we actually experience and then they tend to extrapolate that going forward even under the surface. The household survey may say, “hey, no, I lost my job.” And so they tend to lead and lag at different times. [36:51]
JOHN: Okay. So as I understand it, then, and tell me if I'm right or wrong here, these jobs that are theoretically created, you know, the president says, “oh, we created so many jobs” or somebody in Congress says that, but 80 percent of these are what? Fictitious? Real?
JIM: They are estimated. If you take a look at the job number that was reported for the month of October, we created 160,000 jobs, they revised the August numbers from a 4,000 loss to I think 80,000 plus jobs created, but buried in that report is they said, oh, by the way, the March numbers over stated jobs by 300,000. So, you know, just a little bit of a problem here.
So that's the problem when you're going through an economic slow down and possibly into a recession, the birth-death model is going to overstate the jobs created whereas the household survey tends to be more accurate and reflecting what is really going on. So there is a lag there between those two. [37:45]
JOHN: About 70% of the GDP, meaning the way it's calculated is made up of consumer spending, so if we were to look at that, what are the retail sales telling us about the consumers’ financial conditions?
JIM: Well, if you take a look at the sales numbers, they are in a definite slow down and they've been that way since the beginning of the year and last year. And that has been the picture since January. That trend is now beginning to worsen as we see for example, rising food and energy costs, which consume more of a household budget; higher interest rates on the mortgage resets, that's intensifying.
But I think more importantly is what you find when you dissect the retail numbers. This is what I find is interesting. Most of the categories within retail sales were declining. Where we saw increases was also very revealing. Food and beverage sales are up, mainly grocery stores, along with gasoline stations – going back to the food and energy inflation theory that we talked in the first part of this segment. These increases, John, reflect higher inflation numbers at the pump, higher inflation numbers at the grocery store; two categories of inflation, once again, that we repeatedly ignore when we report on inflation. So if you look at all of the categories of retail sales, they were actually much weaker than the numbers would reflect because the two areas that had robust growth – and I think this is just as a result of inflation – are gas station sales and grocery store sales. [39:25]
JOHN: Yeah. But if we go to the talking heads on the tube, they are saying there is no inflation. So the question is: Is it moderating or firmly under control, or are we really riding a reckless train here?
JIM: Well, you know, another piece of evidence if you take a look at what's going on in the economy and getting to this retail number is that the transportation numbers don't match up with the retail sales numbers. And that's why, I think the retail sales numbers are more inflationary than what we are reporting. If you're selling stuff, then correspondingly you should see increase in transportation. In other words, the boxes are moving. If you're selling a lot of stuff in the store, then that means the boxes are coming out inventory, put on a truck, put on a railroad car and you should see increased shipments. But that's not what we're finding. I don't care anywhere you look in the transportation system, truck tonnage, rail car loading, states sales tax receipts, the trade deficit data on lower imports all point to weakening consumption patterns.
In fact, the American trucking association, their truck tonnage index is down 3% from a year ago. I have three brother-in-laws that are in the transportation industry, two are in the trucking industry and one has a company that finds independent truckers to carry loads. And my two brother-in-laws tell me that business is definitely slowed down, the other brother-in-law in the dispatch business told me there has been a definite slow down. And if you take a look at something called the Cass Freight Index, that index peaked in June of 2006. And the Cass Freight System deals with almost 1200 divisions of 400 major companies representing a wide swath of industries. So it really gives you a good feel for the ebb and flow of goods being shipped and there is a definite slow down in the shipping business, which I think is corresponding with a definite slow down you're seeing in the retail sales numbers. And only thing that is keeping the retail sales numbers in my opinion are inflation. [41:34]
JOHN: So basically what you're suspecting is that the retail sales numbers are much weaker than reported?
JIM: Yeah. I think the volume of goods is down and the value of those goods has been rising because of inflation. And this also lines up with sales tax receipts being down. Now, here in California, there is no sales tax on food items. It's exempt from sales tax. So you have grocery sale stores that are up, but a lot of that is exempt from sales tax. But department stores and discretionary spending and store sales are down, which explains also the drop in sales tax revenue. So if retail sales were strong, then you would expect to see rising sales tax revenues to the state. That's not actually happening and that's because the strongest segment of the sector is grocery store sales and a lot of that is being exempt from sales tax. [42:28]
JOHN: Well, this sort of brings us back in a circle to your inflation thesis that we discussed in our previous topic. I know you've been a strong proponent over the last couple of years that the inflation numbers are bogus. I just make it easier, Jim, I say all of the numbers are bogus. That saves me having to think about it. Okay? But let's go back to inflation and in fact it is really grossly understated.
JIM: Right. They are not only grossly understated. But, John, even the headline numbers is understated as they are, they are rising. Wholesale prices are up 6.1% year over year and even the core wholesale prices are up 2 ½%.
JOHN: I thought the PPI numbers reported this week were a tad low.
JIM: If you were to believe what was reported, the main reason the PPI number was low was that producer prices for energy – you’re going to love this one – fell nearly 1% last month, reversing a 4% jump in the month of September. According to the index, gasoline prices were down 3.1%, food prices increased only 1%. So all you need to do is just look at a chart of the energy complex since mid-August. I don't care whether you're looking at gasoline, oil, heating oil, they've all gone basically vertical. And I expect energy to keep rising along with food prices the remainder of this decade. So you may exclude these items from economic reports, but we're going to have to live with them and adjust to them. And for many in this country this is a fact that's going to be a very painful one. [44:04]
JOHN: That's been probably the core issue is the fact that although the prices are saying one thing, the talking heads are saying one thing, what people are really feeling is a different thing. That creates a tremendous amount of dissonance which creates that social unrest because at some point people say, “I don't care about your blather. We're in terrible shape. Do something.”
JIM: And that accounts for a lot of the cognitive dissidence that we're hearing today where you turn on the cable channels and it's all happy talk. The economy has grown at 4%. We're creating a lot of jobs and inflation is low. And then people are saying, “Wait a minute, I lost my job. I'm having a hard time making ends meet. Even if I have a job. We're struggling to pay our bills each month, I'm having to resort to credit card debt. We're struggling right now, and you're telling me that everything is beautiful.” I think maybe if they can't figure it out, they just know in their own circumstances, it doesn't line up with what we're being told. [44:58]
JOHN: And you're online with the Financial Sense Newshour at www.financialsense.com. We are IPod friendly and we'll be back in just a minute.
Capital
Controls / Dollar Devaluation Where will those dollars go?
JOHN: You know in the ups and downs of everything, Jim, as we think about it, when you talk about the dollar devaluing, when you talk about the guy on the street, they don't really understand that. They don't understand how money increases or loses value or what this means to them. It's sort of one of these dark, esoteric type of situations. We were talking about credit crisis this year, but in reality, the dollar devaluation is a crisis all of its own – related, but all of its own.
JIM: Absolutely, John. I mean if you take a look at where the dollar was in January, where it was around 86, we're now looking at roughly below 76. And it's amazing because when you saw the discussions last week, whether it was Bernanke around the cable channels, you know, the idea was when the Chairman was questioned about the dollar losing its purchasing power, it was like, “well, it doesn't really matter if the things that the buy are in dollars, it doesn't make a difference.” Forget the fact that almost everything you see in a department store or retail store comes from overseas. It's not made here. And so I've talked to clients who have done traveling. One of my larger clients went to Europe this summer and he took his whole family. This is a guy that travels all year and so does a lot of traveling. He said it was amazing to see what happened to the purchasing power of the dollar and how expensive is it was for him to go to Europe.
And so, you know, there are consequences to this dollar crisis that we have. We're going to see it in higher prices domestically. Even China has inflation today. And there is something is that once again, just like the food and energy inflation numbers, “the dollar is losing value, it doesn't really matter much.” It's dissonance. It's just absolutely amazing that all of this stuff that's going around on us that's creating this economic pain, the inflation, is routinely basically thrown out the window – “oh, don't pay attention to that.” [47:20]
JOHN: Last week, remember that row with you and Peter Schiff.
JIM: It was kind of fun.
JOHN: I actually sat here and enjoyed the whole thing when it was going on. Anyway, central banks and governments elsewhere in the world, they are watching the free fall of the dollar, no parachute, no safety so far, they are getting concerned that it's beginning to hurt them. They can't let this go on, so what are their options right now?
JIM: It's amazing they keep responding in terms of, “hey, we're not going to let you get away with this because it is starting to hurt the European economy.” The European economy is beginning to slow dramatically. Japan's economy is extremely weak and Japan is threatened. They may intervene if necessary; and they left their interest rates unchanged this week and it's one of the reasons the yen sort of depreciated a little bit. But what you're starting to see and the first response from central banks is they are looking at capital controls. [48:14]
JOHN: Capital controls is one of those terms that nobody understands. Are we talking about fact that they are not going to let money out of from somewhere, typically borders from out of a country?
JIM: No. It can also work in the reverse. In other words, they are not going to let money in.
JOHN: Okay.
JIM: So you're seeing central banks from Bogota to Mumbai are imposing foreign exchange curbs to take control of their soaring currencies, because they are worried about traders dumping the dollar. So everybody is sort of scattering out of the dollar and there just aren't a lot of places you can go into today. You can go into the Euro, look what's happened to the euro's appreciation. That's impacting the European economy. You know, it can go into the Canadian dollar. I mean CNBC sent one of its reporters this week to Vancouver and talking about that for every one penny that the Canadian loonie appreciates against the dollar it costs them something like $250 million in trade.
And the Canadian finance minister last Friday (that was the Bloomberg article I was citing) said, “you know what, our expert balance is really starting to decline.” So what they are trying to do here, John, is they are trying to set up obstacles to keep the failing dollar from threatening their own internal economy and economic growth. And they are struggling to find new ways to intervene against their currencies; and some of the proposals, you know, quite honestly simply aren't going to work. I mean if you take a look at it, the dollar has lost about 20% against the Canadian currency this year, and 18% against Brazil's real. So, you know, the problem that we're seeing is what they are trying to do right now is use sort of these regulatory-type moves to prevent from having themselves inflate because they are already inflating as they are right now.
As I talk about on the show central bank money supply growth is double digits as you look around the globe today. Even in Canada, money supply growth is around 8%, so they are trying these other measures and it's amazing. For example, in the BRIC countries and the emerging markets where a lot of this money has been going, you have for example in Columbia, whose stock exchange fell 20%, the finance ministry is imposing controls on short term capital. They began this in May by requiring foreign buyers of their stocks and bond to deposit 40% of their purchases with the central banks for six months. So they are saying, “hey, if you want to come in, we're going to place restrictions on you getting out because we don't want to see what happened to Asia in 97.” That’s where the hot money comes in and then, you know, it's no longer hot and then six months later, the hot money is moving out. So they don't want to see these big currency crises. So the currency controls are sort of keeping a lot of these foreign investors on the side line. And in Mumbai they've adopted measures in the month of October to bar funds from investing in Indian equities and imposed investment caps and deposit requirements. And so what they are doing right now is trying non-interest rate methods to stabilize growth and capital flows.
And if this doesn't work, then the next thing they are going to do is they'll try with loosening money. Wait until the Euro gets to a buck fifty against the dollar; and you're going to really see this bring economic pain to these countries. And they are going to respond because that's what the political leaders are saying. And you know, in the month of August, European Central Banks injected nearly $300 billion into the system as their credit system began to freeze up. So this idea that they won't inflate, don't bet on it because the money supply figures speak differently. [52:01]
JOHN: A little bell goes off and goes, ding, time to inflate.
JIM: Or time to inflate more. Yeah.
JOHN: We always talk about the herd going in the wrong direction. We have all of this contrarian sentiment lining up on one side of a trade, could this result in dollar bearishness, but I guess the – why is it we always wind up on the other side? Have you figured that one out yet.
JIM: If you look at the dollar bearishness out there and what has happened to the dollar, one can argue from the contrarian perspective that it's time for a dollar rally. And at some point, John, we are going to get a dollar rally. But it's not going to be because things have suddenly gotten better in the United States that the credit crisis has gone away or that economic growth is now accelerating. What you could get is a dollar rally not because things are going well but because things are starting to go wrong elsewhere with the European economy, with the Japanese economy. Or you could see some kind of credit crisis develop in Europe and the UK or elsewhere, because remember, this is a global phenomenon this credit bubble that we're in. See right now the epicenter of this crisis is centered in the United States, so that's why the money has been money fleeing the dollar and going elsewhere. And that's because the better perception is everything is hunky-dory every place else in the world. But if problems begin to develop, as you're seeing in Japan, as you're seeing in Europe and as account surpluses begin to dissipate or their economies begin to slow down. I mean Europe is almost reversing itself. The reforms that Germany tried to put in place with labor and taxation in Germany now are being reversed. They just increased their VAT tax, so Europe is going in the wrong direction and that's going to lead to problems there. So if we get a dollar rally, it will just mean because things have gotten worse over there. [53:59]
JOHN: Okay. Well, this creates a problem, though, because say people are looking for safe haven from the dollar, which I always maintain was going to create a problem for us because if dollars begin flooding back to our shores, that would really just goose our inflation up even higher. But all of that aside, say you're going to look for safe haven There is the pound, the Euro, the Yen, maybe a couple of other candidates. They really don't have the base that you would need to absorb all of that. So that's creating a problem as well. There is no substitute right now for the dollar.
JIM: No. In fact, even the China's officials say the dollar is still going to be one of the main currencies out there. It's just is that central banks are diversifying. The problem is that you have is right now not all of that money that can move out of the dollar can move into Euros, pounds, Swiss franks or loonies. And to give you an example: Because it's been called a petro-currency, the Canadian dollar, a disproportionate amount of these dollars that are moving out have moved into the Canadian dollar and look what it's done. It's gone up nearly 20% against the dollar. And it's really start to go hurt the Canadian economy. I wouldn't be surprised if you see GM in the future close down its Canadian plants.
So it's got to find a home somewhere and there is a little bit of an indication of what's maybe coming and that's the sovereign funds where these central banks are setting up these investment pools are saying “hey, we know money printing is going around, we know there's inflation all around. But you know what, we're going to take some of these dollars that we have and we're going to redeploy them into hard assets.” So I think you're going to see another drive that is going to go into the resource sector – whether it's energy, base metals, precious metals, hard type assets, infrastructure type assets – because investors are going to need an inflation hedge. And that means the commodity stocks, the resource stocks, I think are going to be a home for a lot of this money.
That’s because let's face it, any time there is a crisis around the globe, what do central banks do, what did the European Central bank do in August? They injected $300 billion into the system. We injected nearly half a trillion dollars between August and September. And the Fed is still injecting money into the system as are other central banks. So this hasn't stopped yet. So the question is with all of that money going up there, it's going to find a home. And my bet is it's going to drive the next phase of the resource market.
But in summary, what we're seeing happen right now is central banks are using sort of non-traditional methods, capital controls, very similar to what happened in the 70s in Switzerland as money was pouring into Switzerland because of the dollar's depreciation. The Swiss banks charged you interest to put your money in the bank instead of paying you interest in order to sort of keep money from coming in at a high rate. They actually charged you an interest rate. And that's what central banks are doing right now. They are trying non-interest rate methods to try to stabilize growth and capital flows as money seeks a safe haven. But I think eventually, we are going to see, I don't know what level, if it's 71 on the Dollar Index. Who knows what that number is going to be.
But if we do have a rally it's going to be because of things worsening elsewhere because I expect the Fed to continue to cut interest rates as we've talked about in the last segment. Everywhere I look, all of these economic numbers are weakening. And it's been a broad trend, a consecutive continuous trend of weakening, and the credit crisis as John Bain [phon.] just talked about this week, it's going to get worse. And we're seeing a lot of that on Friday with Fannie Mae biggest two day decline since 1987. So you know, the credit crisis hasn't gone away, the economy is weakening, there are a lot of stuff going on and that's why I think the Fed has got to maintain its inflation image even while it injects money into the financial system. But they are going to inflate. [58:08]
JOHN: Yeah. But what you're talking about right now so people understand too is the fact that we're on this big carousel and you're describing right now one side of the carousel. Now, keep your eye on the guy with the ice cream cone there because we're going to see him again on the next time around, aren't we? We're going to keep in the cycle?
JIM: Absolutely.
JOHN: That's the end of this first hour for the Financial Sense Newshour Big Picture www.financialsense.com. We try to keep you calm during all of the chaos out there, which is why we call it dot com. I think that's an equivocation isn’t it. We'll be back with more of the Big Picture with Jim Puplava and John Loeffler right after you go away and we come back. Bye bye.
JOHN: Well, here we are back into the second part of the Big Picture for today. We do have Q-lines coming up in a later segment after we get done with some of the things we're discussing right now. We have a couple of other issues. One of these I've noticed, Jim, is it's amazing how much a person's world view or ideology overwhelms what they are able to see. I mean there have been times when you – when blaring proof is standing right in front of somebody whose opinion it contradicts, and they are still trying to find ways of explaining around. And you finally just blurt out, “you really just don't get this; do you? You've been sort of shot out of the sky on this one and I know you're wondering why your tail feathers are on fire, but you really just don't get it.”
Jim, you've been a commodity bull since 2000. I know you have invested your client portfolio in this area. You've done well as a matter of fact. I can attest to that. So I'll sign an affidavit if you want me to do that. But now there are analysts and commentators who question this assumption. Well, certainly we see a lot of this happen whenever we get pull backs, which is exactly what we saw this week. And it was not unexpected either. You must admit we both sat here and expected that to happen.
JIM: Well, absolutely. If you take a look at a chart of energy or gold since mid-August, John, it looks like a NASA space launch on a chart.
But usually in any bull market you have three phases: In phase one smart money sees an opportunity, they get in early; phase two, it works its way up to institutions, they come in; phase three, the public gets in. But what has been surprising for me in the cycle that despite stellar earnings that we’ve seen from the sector over the last five years, the sector still remains underowned and unloved. This has been reflected, John, in PE multiples that you see in the sector. It doesn't matter where you look in the energy sector, whether it's international oil companies, domestic companies it's pretty much the same. I mean it's pretty hard or surprising that if you look at the sector as we do and look at valuations that there are still energy companies that are selling at a discount to net asset value in a market that is seeing the price of energy go from 18 to $20 a barrel all of the way up to $95 a barrel as we are in this Friday; or if you look at the natural gas prices, which are at over $8 that used to be at $2. [2:35]
JOHN: You know, when you talk about PE multiples that's another one of those terms we sling around and discounts as well. Let's do some examples so this vivifies it in people's minds.
JIM: I'm just going to take an example of a large oil company, Exxon Mobil. If you take a look at Exxon Mobil, Exxon Mobil supports a PE of 36 in the last bull market which ended in the first quarter of the year 2000. Today, despite enormous earnings the PE is around 12. So it's around one third of where it was the year 2000. You can look at another large oil company –Chevron – which carried a 27 multiple in 2000, today it's around 10. It doesn't matter. You can even look at domestic companies or companies that are more oriented domestically. You take a look at companies like Anadarko which had a PE in the 40s and 50s in the last bull market. Today it carries a multiple of around 15. It's surprising. Five years worth of earnings gains, five years of rising prices and the multiples have not expanded. [3:41]
JOHN: Well, maybe that's why the billionaires are doing what they are doing. We're talking about Warren Buffett; T. Boone Pickens; Richard Rainwater. They've all increased their stakes in energy.
JIM: Sure. The smart money has been buying and I expect that to continue, by the way, simply for the very fact that I just mentioned, is that a lot of these companies are selling at steep discounts or discounts to net asset value; and the price of energy is still going to go up. So usually what happened at the start of a bull market, the top performing sector may end up selling at a discount to the market's multiple. And then as the bull market unfolds, the sector moves its way even to the market multiple or maybe a slight premium. And then towards the final stage when everybody knows the story, the sector has more analysts covering it, the discount vanishes and is replaced by a huge premium.
And this is what you saw in the tech sector. 92 and 93 be were buying tech stocks at 13, 14 times earnings. At the end of the cycle, they were going at triple-digit PE multiples. So that's indeed, I think, the case you’re seeing right now with resource stocks today especially in energy.
And that's why I think you're seeing people like Buffet or Carl Icahn because Anadarko is selling at a discount to its net asset value. So you know, when you're looking at the market today, the PE ratios certainly aren't where they were, let's say, in the last bull market. But you're looking at the PE multiple on the S&P 500 is at 18. If you're looking at a PE ratio on the NASDAQ at 37, or a PE ratio of the Dow, I mean the PE ratio on the Dow is pretty high right now and that's because a lot of companies have seen their earnings go down or are actually losing money. So I think that is going to change as we get into this next phase of the cycle. [5:36]
JOHN: And we've seen rising oil prices, gold and silver are up since we began doing this show way back in 2001.
JIM: If you look at, and is this why I think it's very important to understand fundamentals. And especially when you get the pull backs that you've seen today, the fundamentals are getting stronger every year. Take a look at the economies of China and India, they require more energy to run their economy because that's where most of the manufacturing takes place. And manufacturing economies are more dependent on energy. Also as their populations get wealthier they are going too develop an appetite for better diets, better shelter, other consumer goods. Whether they go out and buy a motor scooter, a car, refrigerators and air conditioners, or plasma screens –all of that is going to require the use of raw materials to make. [6:30]
JOHN: We were talking in one of the previous segments about inflation. How is that going to factor into this?
JIM:
When people start wising up and taking a look and say
”wait a minute, I don't buy the idea that the core rate of
inflation is 2%,” they are going to need an inflation hedge
in the years to come. Especially when you see today the major
central banks of the world from the Fed to the European Central bank
to the bank of Japan creating oceans of money. There is going
to be a tsunami of money –and I mean a tsunami – moving through
the economy in the financial system. So there is little
possibility first of all that we're going to see deflation. So
when you see central banks taking extra ordinary measures to inflate
whenever problems arise in their economy or financial system,
deflation is a remote possibility. [7:14]
JOHN: So you would expect what? Inflation to be another driver in this whole factor?
JIM: Sure. Because once again, going back to something we covered in the last segment, not all of that money that's going to move out of the dollar is going to be able to move into Euros or the loonie. Remember almost all major central banks are inflating. And what that tells you is when central banks are setting up sovereign funds, that should be your first clue of what's going to happen; and take a look at what they are buying. Those sovereign funds are going to be buying real assets.
And the thing you have to think about, especially if you look at the mining sector, gold mining especially, is the sector is so small in comparison to other sectors, or let's say other asset classes, that the money coming in is going to drive prices higher. I mean you look what the industry was raised on in the last commodity bear market. Everybody went to just-in-time inventory, which means companies are carrying very low inventories at a time the inventory levels of major commodities are at record lows. So if you look at the supply side of that equation, it's going to take a longer to bring a mine or a new oil field into production. So supply isn't going to keep up with demand and we have all of the ingredients, at least in my opinion, for another major bull run –the second phase – which is going to be in my opinion very explosive. [8:42]
JOHN: What about volatility now? Look what the happened this week to energy and precious metals. Again, we expected the pull back after really this surge upwards.
JIM: You know, a lot of what I think happens this week relates to the Yen carry trade. The Yen, John, has gone from 124 Yen to the dollar in June to today where it's 110 yen. And so if you borrowed in yen in the yen carry trade, you need to cover your positions and remain solvent. So if you're leveraged to the hilt, you need to liquidate and what you liquidate is where you've made profits. So you take a look at what has done this well in the market, the top performing sectors have been energy metals and technology. So they were probably the hardest hit sectors. But the fact remains with inflation on the rise, the dollar's devaluation and central banks inflating globally, there is going to be this big money tsunami out there.
And you're going to see greater inflation globally – you're already seeing it. In fact, my son Chris wrote an article about this in last week's Wrap Up and you're going to see also a lot more volatility. There is a lot more leverage out there. And as we talked about in the first segment in the Big Picture, in the latter stages of inflation, money velocity increases, volatility increases. And that's here to stay. So what you need to think about is make it your ally by buying when others are panicked selling. I think more importantly right now is to keep yourself focused on the end game and stop worrying about short term fluctuations. [10:22]
JOHN: So I guess it goes without saying, James, that you were probably backing up the trucks this week.
JIM: I've been buying every single day this week for my own account, for client accounts. I love it actually, when you see these violent selloffs like we saw on Monday and panicked selling. It always gives you a better opportunity to accumulate more shares in the companies that you maybe you missed out on a chance if there was a company or stock you wanted to own or it got away from you; or for that the matter you're buying bullion, you want to buy more ounces of gold and silver. Remember the end game when this is all done and said is to own as many shares and ounces as you can afford. And buying panics are going to give you that opportunity. [11:09]
JOHN: And so obviously you're not worried about the pull back because it was something we expected.
JIM: It was not only something we were anticipating but also I look at these panics from a different perspective. If you really want to become an investor investors need to become investors. If you're worried about the price on Monday or Tuesday, you're not investing, you're speculating. And when you see these panics, you need to start asking questions before you sell. You need to ask yourself, what has changed this week? Is the Fed going to stop erasing interest rates? Is the credit crisis gone away? Are central banks stopping inflation? Is inflation going away? Has everything improved? These are the things that you need to ask yourself. In fact, this week they injected more reserves in the banking system. So are they going to cut rates again? Most definitely. Has the credit crisis gone away? No. It's going to get worse. Remember from an investor's perspective, one man's fear is another man's gain. [12:08]
JOHN: And Financial Sense Newshour continues here. We're going to switch to Other Voices right at www.financialsense.com coming up next as I said other voices. Later on we'll look at your Q-line questions as Financial Sense Newshour and the Big Picture continues.
Other
Voices: Matthew Simmons, Chairman, Simmons & Company Int'l
JIM: Well, here we are with oil prices over $90 a barrel. The International Energy Agency has reduced its fourth quarter demand. But are those levels realistic? Joining me on the program is Matt Simmons, he’s President of Simmons International and author of the best-selling book Twilight in the Desert.
Matt, I want to begin with a headline that we’re going to go with this segment of the program: “Peak Oil – it’s here.” You have individuals like yourself, geologists like Ken Deffeyes, T. Boone Pickens and Dr. Bakhtiari – let’s talk about why peak oil’s here and let’s talk about the May 2005 figures.
MATT SIMMONS: Let me add one more very important voice to this issue who gave a stunningly crystal clear address to the Oil and Money Conference in London two weeks ago, Dr. Sadad Al-Husseini. Now, he’s not a household name unless you know anything about Saudi Arabia, but he was until three years ago the executive vice-president in charge of oil and gas for Saudi Aramco, and he’s got his PhD in geology from Brown University. And his talk basically laid out area-by-area of the world, and then finally the Middle East, and he showed the $54 billion of projects that are being done in his kingdom he used to be in control of and what their production targets were. And then he finally added up and showed if everything works we are basically now at an undulating plateau for 10 years before we go into a very steep decline. Someone afterwards commented about what a pessimistic analysis that Dr. Husseini gave and he took the microphone and he said, “Excuse me, this is best case!” [14:14]
JIM: If you take a look at Congress is working on a global warming carbon credit trading – global warming still dominates the news.
MATT: I was speaking actually in your neighborhood, Caltech, two weeks ago, and one of the things I did out of curiosity is I went on Google and typed in “peak oil” to see how many responses it got. And it was impressive, it was like 3.1 million; and then I typed in “global warming” and it was 82 or 83 million. So I suspect that that is not a bad gauge if you were looking at sort of the scales of justice and putting sand on one side and sand on the other and saying, “what are the two big woes?” Well, there are 80 grains on the global warming worry and basically 3 grains on peak oil. And what amazes me about that is the very most shrill of the global warming alarmists aren’t arguing that basically it’s going to do anything materially to impact our lives for next sort of 20 to 30 years. What they’re saying is you’ve got to start now to have any sort of impact on what could be a tipping point. And what I find so interesting is that if we actually have peaked