The
BIG Picture Transcript
March 1, 2008
Part 1 Real
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Part 2 Real
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Part
1
Monetary
reflation, bailout, helicopter drops & other forms of
intervention = Hyperinflationary depression
Other
Voices: Eric King, Analyst/Trader
Part
2
Other
Voices: Mark Bailey, Director, President & CEO, Minefinders
Corp. Ltd.
Other
Voices: David R. Webb, President & CEO, Tyhee Development Corp.
Part
3
Q-Calls
Monetary
reflation, bailout, helicopter drops & other forms of
intervention = Hyperinflationary depression
JOHN: Well, it's time we do some business and housekeeping here on the program. Just wanted you to know, first of all, I think Warren Buffett is coming around to your point of view, Jim, because Buffett's outfit Berkshire Hathaway took a major stake in the manufacturers of – drum roll – Oreo cookies. So apparently he seems to be agreeing with your Oreo theory. He thinks it's going somewhere.
Basically, he took a $4.32 billion stake in Kraft Foods which makes Maxwell House coffee and Oreo cookies and cheese whiz, all of that good junk food for you. Something else I have here. We're going to hold it up to the microphone. I'll sell this to you for $1000. I'm sure you're find this of value. This is a bill for 100,000 marks, Reichsbank note, written in 1923. It even says if you falsely reproduce this, you could be put in jail for over two years because this 100,000 marks, Jim, you going to give me a thousand bucks for it? Huh? I've got it right here. Of course that was from the time of the great inflation back in Weimar, Germany.
Well, where are we at the end of the week? Gold was floating somewhere around 972. Silver 19.78 last time I checked heading towards 20, just a few pennies shy of $20 now. Commodities are at double digits.
Have you been watching Bubblevision this week? They were talking about that, “is this a commodities bubble.” Are we on the same planet?
There are comments and articles about the great Bernanke reflation, which is sort of what it is, but even more important, Jim, more and more people are beginning to draw parallels between what happened in 1929 and the Great Depression and what we are setting the stage for today. So that's what's going to frame everything happening here on the Big Picture.
JIM: Yeah. We've been talking on the program. We did a series last fall on the great reflation. We talked about Germany, what happened there. And here's the conundrum that the Fed finds itself in. I mean if you were to listen to Bernanke on Capitol Hill he sounded like a battle field commander coming in on a war that is not going well. We have problems on two fronts: We have a financial crisis (the AIG losses reported after the market closed on Thursday); you also have an economic slow down. And then at the same time, you also have rising inflation.
So the more the Fed does to fight the financial crisis and the potential recession, the worse the inflation threatens to be. And quelling the financial crisis and lifting the economy remains right now, as the Fed indicated – and we're going to play a clip here shortly – remains the Fed's top priority.
And it's amazing all of the things that have come out this week, you've got – let me just get to this article. There was an article on the FDIC. They are hiring the FDIC staff for financial institutions that are closing down, they are even calling back retired employees. They are down to 223 employees according to FDIC spokesman Andrew Gray. The FDIC is looking to bring back 25 retirees from its Division of Resolutions and Receiverships, and that goes back to the late 80s, 90s crisis with the S&L where there were more than 1000 financial institution that failed amid the Savings and Loan crisis.
And so they are going to beef up the staff. They need to beef it up back up to about 400, and the regulators are bracing for well over 100 bank failures in the next 12 to 24 months; and they said they need to beef up their Receivership Management division, so if you're looking for a job as an auditor, the FDIC is currently rating 65 banks and thrifts as problem institutions at the end of the third quarter, up from 47. And, for example, in the S&L crisis, they had 572 problem banks and thrifts and even though more than a thousand.
So we have all kinds of financial problems that seem to be escalating out there, so as the economy weakens, we're seeing more signs of that. As financial conditions and credit tightens and gets worse, the Fed is going to respond with more money printing. And it was amazing because you had all of the Fed doves out this week. And they are making sort of the intellectual argument, if you will, for all of this money inflation that's coming. In fact, the Fed announced on Friday that their Term Auction Facility, they are going to beef that up to 60 billion for two credit auctions in the month of March. Since the TAF began, they've injected 160 billion, and by March, they will have injected 220 billion. And John Williams from Shadow Stats reports that M3, as of last month is growing now at about 16 ½%.
Let's go to that Bernanke clip where he is indicating that the Fed stands ready to basically chop down every tree in the forest.
BERNANKE: The FOMC has responded aggressively to the weaker outlook for economic activity having reduced its target for the federal funds rate by 225 basis points since last summer. As the committee noted in its recent post-meeting statement, The intent of those actions has been to help promote modern growth over time and to mitigate the risk to economic activity.
A critical task to the Federal Reserve over the course of this year will be to assess whether the stance of policy is properly calibrated to foster our mandated objectives of maximum employment and price stability in an environment of downside risk to growth, stressed financial conditions and inflation pressures.
In particular, the FMOC will need to judge whether the policy actions taken thus far are having their intended effects. Monetary policy works with a lag. Therefore our policy stance must be determined in light of the medium term forecast of real activity and inflation as well as risks to that forecast.
Although the FMOC participant's economic projections envision an improving economic picture, it is important to recognize that downside risks to growth remain. The FMOC will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely matter as needed to support growth and to provide adequate insurance against downside risks.
JIM: So, John, there you have Bernanke basically saying, look, we've got a lot of problems out there, and chief among them is what's happening with the economy and what is happening to the credit system and banking system.
And the Fed knows if the economy goes into a recession, then the credit situation and banking situation gets all the more worse because what happen is people lose their jobs in a recession, they can't make their mortgage payments. So you may have people right now that are perfectly fine financially, they are meeting their debt obligations, they are meeting their credit difficult card payments, mortgage payments, but in a recession people lose their jobs; and yet it is absolutely amazing as Ron Paul was talking about economic growth is healthy for the economy, but creating all of this inflation, there are going to be consequences. And that's what people don't realize is, look, everybody wants the government to bail people out, they want stimulus packages, they want tax rebates, they want all kinds of bailouts. But, John, all of that costs money.
And what people don't realize, the consequence of all of this intervention, the consequence of all of this money printing, the consequence of this government spending is the higher inflation rates that people are experiencing. I mean I don't need to tell anybody that has gone to a grocery store lately what is happening to their cost. I mean you've got gasoline prices in the mid-threes going up to four. You've got $2 for over a carton of milk. Everywhere you look, it is just absolutely amazing to see what's happening to costs. And unfortunately, you've got Fed governors coming out sort of preparing the intellectual arguments for, well, you know, if you look at the core rate –there were two Fed governors this week, Mishkin was one of them, coming out and saying, “you know what, well, the core rate of inflation isn't going up as fast.” The problem is, you know, most people don't pay the core rate of inflation. Americans don't pay their bills with core dollar bills. They have to pay them with regular dollars. And unfortunately it's going up much higher than what the Fed is leading on. [9:03]
JOHN: Yeah. But also because people don't understand that, then they turn to the politicians and say, “do something!” In other words, they don't understand the source of this. They understand that they are hurting, but they don't understand the source of the pain.
JIM: Yeah. Because they are saying, look, food costs are going up. We know food costs are going up because of government policies to divert almost 25% of our corn crop into the production of ethanol which is highly energy inefficient, so that is the government policy that is driving inflation.
This week we had a shut down of a nuclear power plant that cut power to a lot of Florida residents. John, we don't have spare capacity in the grid system. In California, any time during the summer when we experience a heat wave that comes through the state, we get rolling black outs because they are not building power plants. We’ve decided even though we're going to export coal to other countries where they are building clean coal power plants, we are not going to build them here. We are still late in getting our nuclear power plants. So all of these government policies are creating this and then Obama has got a UN tax that would impose almost a 1% tax on the gross domestic product of this economy and that tax would be imposed on energy producers.
And John, you and I know corporations don't pay tax. Individuals do. Because what's going to happen, it's going to drive up the cost of producing power, and that cost is going to be passed on to you and I as consumers. [10:32]
JOHN: Yeah. I think what you're trying to say there so people understand is yes, there is a corporate income tax, but what the corporations do is just simply fill out the forms, they write the check, but they pass that cost on through to their clients who are using their services or their goods. So ultimately, the tax just funnels right around back through to the normal tax payer.
JIM: Just take a look at this Obama UN tax on the US, equivalent to 1% of our GDP. That's going to be a 75 to $85 billion tax that's going to be placed on the energy industry, and this is a Senate bill that he's proposed. And what is a utility going to do? If you increase a utility’s cost by 10%, what are they going to do? They are going to go to the rate commission and say, look, our cost just went up 10%. We need to have a certain rate of return in order to produce power. We're going to apply for a rate increase to cover this cost, and it's going to be passed on to the consumer.
So there are consequences to all of these actions that the government creates these problems, and then we as consumers see it in our day-to-day lives. It's absolutely amazing. I started out my career in this business in the late 70s, and the two words in the financial planning industry that we were helping people to cope and plan for were: taxes and inflation. And here we are, John, almost 30 years later. We've come full circle again to rising taxes and inflation, and people kind of wonder, “well, gosh, why are milk prices, why are beef prices, chicken prices, why are my utility bills doing up, why are gas bills going up.” And it's simply this: The government is spending more than it takes in and in order to pay for that, they create inflation. [12:18]
JOHN: Let's put this into some perspective because a lot of times here on the program we become what I call US centric, and the whole issue of monetary expansion is not just a US phenomenon. That's the first thing. This is happening worldwide. All of the major central banks are expanding their currencies. I guess you can compare currencies to ships on an ocean. They've all got holes in the bottom, and some are sinking faster than others, but they are all sinking.
Number two, as a result of that, we're finding commodities worldwide continue to soar upwards, and always keep that in mind as we say that, that people in different countries always turn back to governments the cause of the problem to say “fix the problem.” And that's the conundrum that the tax payer worldwide gets stuck in.
JIM: Yeah. We comment on this periodically, but I think it just stresses the point. I mean you have Russian money supply growing at 44%, India's money supply growing at 23%, Australia's money supply growing at 23%, Brazil growing at over 18%, Denmark at 17, China at 17, England's money supply growth rate at 12%, Mexico's at 12, Korea's at 11, the US is at 16 ½.
Now, when money is created, people don't take this money and credit that these central banks and governments create in the economy. It doesn't go under a mattress or somebody buries it in the backyard. It finds an outlet to some form of investment, either a tangible good. And one of the areas it's finding way in is into the commodity sector.
Now, this is how you do get bubbles created. You have a supply and demand imbalance, which is what you have in commodities today. You have more demand for energy than there is supply. Supply is struggling to keep up with that demand. So as money is created, it's going to find the outlet. And commodities are not a bubble yet, but I believe very strongly by the time we're done with all of this that will be the ultimate bubble.
Now, putting this into perspective, last year we had oil prices up nearly 60, 70%. Already, year to date, we've got oil prices up over 6%. We've got heating oil up over 7. You've got natural gas prices up 27%. You have coal prices up 17. Steaming coal up 15. You've got gold prices up 17%. Silver up 33 ½%. Remember we said one of our predictions is that silver would out perform gold this year and that's proven to be the case. Platinum prices up 39, almost 40%. Palladium up 43. Aluminum spot prices up 30. Copper prices – remember, with the economy is slowing down, copper was going to decline. Huh-uh. Copper prices up 28%. Led up 32. Nickel up 21. Tin up 14. Zinc up 16. Ethanol prices up 7. Corn up 20. Wheat prices down slightly this year, down about 6%. Soybean prices up 24%. Sugar prices up 26%. Cotton prices up 18.
John, I could go on and on. When you see those raw inputs into the production process, whether you're making food or you're building something, steel or whatever it is, these are the raw inputs. And when they are going up like this, manufacturers have no other choice but to pass these costs on to the consumer.
And so while all of these costs are going up, while we are begging for the Fed to lower interest rates, we're begging for the government to intervene, give us rebates, take away this pain, what we don't realize, it's just going to make it worse, which is what Ron Paul was basically talking about that. [16:14]
Chairman Bernanke, earlier you were asked a question about the value of a dollar, and you sort of deferred and said, “you know, that's the Treasury’s responsibility.” I always find this so fascinating because it's been going on for years. Your predecessor would always use that as an excuse to not talk about the value of the dollar, but here I find that the chairman of the Federal Reserve who is in charge of the dollar and in charge of the money and in charge of the what the money supply is going to be, but we don't deal with the value of the dollar.
But you do admit a responsibility for prices. But how can you separate the two? Prices are a mere reflection of the value of the dollar. If you want to control prices, then you have to know the value of the dollar. But if you're going to avoid talking about the dollar, then all you can do, then, is deal with central economic planning. If we stimulate the economy, maybe there will be production and prices will go down. And if prices are going up too fast, you have to bring on a recession. You have to try to balance these things, which I think is a totally impossible task and really doesn't make any sense because in a free market if you had good economic growth, you never want to turn it off because good economic growth brings prices down just like we see the prices of computers and cell phones. Those prices come down where there is less government interference.
But you know, the hard money economists, who have been around for a while, they have always argued that this would be the case. Those who want to continue to inflate will never talk about the money because “it isn't the money supply that is the problem. It's always the prices.’ And that is why the conventional wisdom is everybody refers to inflation as rising prices instead of saying inflation comes from the unwise increase in the supply of money and credit.
And when you look at it, and I mentioned in my opening statement that M3 now measured by private sources is growing by leaps and bounds. In the last two years, it increased by 42%. Currently, it's rising at a rate of 16%. That is inflation. That will lead to higher prices.
So to argue that we can continue to do this, continue to debase the currency, which is really the policy that we're following, is purposely debasing, devaluating a currency, which to me seems so destructive. It destroys the incentives to save, and if you don't save, then you don't have capital.
Then it just puts pressure on the Federal Reserve to create capital out of thin air in order to stimulate the economy. And usually that just goes into malinvestment and misdirected investment into the housing bubbles, or the NASDAQ bubble. And then the effort is once the market demands the correction, what tool do you have left. Let's keep pumping, pump, pump, pump. And it's just an endless task. And history is against you.
I mean history is on the side of hard money. If you look at stable prices, you have to look to the only historic sound money that's lasted more than a few years. Fiat money always ends. Gold is the only thing where you get stable prices. For instance, in the last three to four years, the price of oil has tripled. A barrel of oil 20 to $30 up to $100 a barrel. And yet, if you look at price of oil in terms of gold, it's absolutely flat. It's absolutely stable. So if we want stable prices, we have to have stable money. But I cannot see how we can continue to accept the policy of deliberately destroying the value of money as an economic value. So immoral in the sense of how about somebody who saved for their retirement and they have CDs and we're inflating the money at a 10% rate. Their standard of living is going down, and that's what's happening today. The middle class is being wiped out and nobody is understanding that it has to do with the value of money – Prices are going up.
So how are you able to defend this policy of deliberate depreciation of our money? [20:11]
JOHN: Of course, that was congressman Ron Paul this week testing the value of Ben Bernanke’s anti-perspirant because it's getting harder and harder to slough that off; isn't it? As things continue to unravel in this area here, the value of what he's saying is becoming clear to a lot of people.
JIM: You know what's interesting, if you go back and study the great inflation in Germany, you had members of the Bundesbank (at that time it was the Reichsbank actually) making the intellectual arguments about, well, you've got all of this rising prices, but it's due to the falling Reichsmark, and that's not our fault. Now this week you had two or three governors come out and say, basically, they are making the intellectual argument for further inflation. And that is a warning, John. And I think it's one of the reasons why you've seen since the beginning of February the dollar has lost about three or four percent of its value, and many think it is going much, much lower. But bear in mind, we're not the only ones doing this. Other currencies are losing their value. As the great market technician Richard Russell recently wrote: “There is something strange going on. There is something that nobody is picking up. Gold is going up against almost everything.” Meaning that everything else is depreciating in value against gold. [21:14]
JOHN: Yeah. But having said all of that, Jim, that mind set that you're talking about that, in other words, that even Ron Paul is talking about that we need sound money it's making a huge amount of traction. However, at the same time we have Wall Street crying for cheaper money; and out of Congress, now, there is a plethora of intervention proposals now on the table. Why don't you list some of these because this is going in exactly the opposite direction.
JIM: Yeah. And what is absolutely amazing is now the next stimulus program – it’s been called ‘Son of Stimulus’ is they want a tax payer bail out program for these bad loans and mortgages. You've got almost five or six of them out here. You've got representative Barney Frank who wants to allow the Federal Housing Administration to help up to one million distressed homeowners refinance into government-backed loans and spend 10 billion on loans and grants so states can buy up foreclosed properties.
The most dangerous one is by Senate leader Harry Reid. He wants to allow bankruptcy judges to alter the terms of mortgages in foreclosure. So what he's arguing for here is let's say you buy a house for 100,000. You have a 95,000 mortgage on the house and suppose you can't make your payments as they are reset. So now the value of you're property has dropped to, let's say, 70,000. You file in foreclosure. What happens is the bankruptcy judge can say, “you know what, your new mortgage is not 95,000. We're knocking it down to 70,000. And instead of a 6% interest rate, I'm going to determine your interest rate is going to be 3% because that's all you can pay.”
What people don't realize that does is first of all, that would dry up credit. And secondly, it would almost cause interest rates to triple because if you're a banker, how do you make a loan under the premise that the terms of the loan agreement that you've made may be changed arbitrarily by some judge.
And John, just imagine the fraud that can take place. Someone goes out and lives way beyond their means, charges up a bunch of things on their credit cards, they default on their mortgage and then they get their mortgage reduced and the interest rate reduced because some judge says, “okay, this is all you can pay, well, we'll knock 30 grand off your mortgage and we'll drop the interest rate in half.” No lender is going to want to operate in an environment where the sanctity of contract law...you know, there was – you've seen the book and I think you’ve read it, John, I interviewed the gentleman many, many years ago, not on this web cast but when I was doing local radio in San Diego, and he wrote a book called The Mystery of Capitalism and his name was Hernando de Soto, and he did a study of why there was poverty in the world and why there was prosperity. In other words, why was South Korea prosperous and why was North Korea filled with poverty. And he looked at that and it was the sanctity of property rights that distinguished the difference between those countries. And everywhere you look around the world, when there is no sanctity for contract law, there is no sanctity for property rights, there is no capital build up. There is no capital accumulation because there are no safeguards for accumulating capital.
And Harry Reid's proposal to basically leave judges to decide what happens in a mortgage foreclosure...You've got another proposal by Chris Dodd, for example, which would be similar to the Depression era Homeowner's Loan Corp, which would buy troubled mortgages from banks and investors and move borrowers into more affordable loans with government backing. You have Credit Suisse recommending that thousands of additional borrowers to qualify for loans backed by the FMA. We just had the caps lifted this week for Fannie and Freddie to allow them to make jumbo loans up to 700-and-something thousand dollars.
And there was a proposal this week by a very well known economist that says that policy makers should consider – and this is by the way on the agenda – a tax payer finance fund to buy mortgages and mortgage securities. So we would bail out the banks, and we would bail out people that have got into debt over their eyeballs. The question is for those people that are working hard and making their mortgage payments, they are going to get stuck with this because you can't do these bailouts, you can't print money, you can't guarantee loans without it costing anything.
See, what politicians don't tell the voters is this is all going to come at a great cost: Your personal freedom, jeopardy to property rights, higher rates of inflation. And yet what do we hear? There is a chorus in Washington calling for bailouts. [26:34]
JOHN: Yeah. What it's doing is taking people who made good loans and still maintaining them, they are going to fund the loans that went belly up. That's sort of putting it in vernacular that people can understand. It's also interesting, there was an article by Ambrose Evans Prichard in the London Telegraph – I've been reading his stuff for years – and he said inside the Fed right now there was an obscure paper written by Fed staffers David Small and Jim Clouse exploring what could be done under the Federal Reserve Act when banks refuse to loan because, as I was talking to one loan officer for a bank, he says “we're trying to figure out what's going on because in trying to package loans for people now, the prime will go down and yet the interest rates bankers are willing to loan at goes up.”
And apparently according to section 13, sub 3, allows the Fed to take emergency action if banks become unwilling to provide credit. A vote by five of the Fed governors can in exigent circumstances –is what it says in this paper – authorize the bank to lend money to anybody and take upon itself the credit risk. And it's been ages since that clause was evoked, but that's exactly the situation you’re talking about here as banks go, “whoa, this is getting a little flakey.” [27:44]
JIM: That's interesting that you bring up that article because we're going to start another series called helicopter drops. And during 19 – I think it was 1999, Ben Bernanke wrote a piece for Foreign Affairs saying, “look, if we get into a deflation, here are some steps we ought to take.”
Now, for example, the Term Auction Facility that the Fed is now using as part of its tool box including another 60 billion coming next month, that was in these papers. And there was a series of papers written by the two Fed research staffers that you just mentioned. There was also a paper by Bernanke, and is there was a series of papers written between 1999 and 2002. And remember when we were going through the tech bubble, the events of 9/11 and a recession, and Greenspan cut interest rates from 6% down to 1% and the economy was having a difficult time gearing up again until finally they cut it so low that they gave us the real estate bubble; and now we're dealing with the consequences of that bubble as it burst.
But I want to go through those research papers and we'll do that. We're going to start another series because as these traditional remedies do not work, you are going to see more intervention and you're going to see Fed policy expand in ways that we've never seen. And this is the guy that says, look, forget about deflation. A central bank can always create inflation because there is no limitation in terms of the amount of money and credit that we can create.
And unfortunately, John, all of these bailouts, all of this money printing, all of this lowering of money is going to cause great harm to the economy, our economic freedoms and higher rates of inflation and it's going to hurt the middle class and the poor who are crying for the very remedies that are going to make their life miserable. [29:44]
JOHN: Yeah. But that is the limitation. I think he's wrong about that. I mean there is a real world limitation in that at some point the middle class and the lower classes can't take the abuse anymore. And as I mentioned earlier, remember earlier in the conversation, the middle to lower classes when they see this still don't understand what causes it, and call for those things that you're talking about that. It does make it worse, but sooner or later, there is a blow out. It just can't go on forever.
JIM: But unfortunately, if you look at the sequence of events, I mean imagine the steps that Congress is now taking right now when we have a 5% unemployment rate and economy – well, you know, the numbers are somewhat suspect, but let's say we're not in a recession yet officially; I think we are if you use real inflation numbers – but what are these guys going to do by 2010 when we're in a depression because the sequence that we're projecting here is this year we've got a rough first quarter – the Oreo theory – we're going to have a creamy filling because listen, there are going to be enough stimulus packages, they are working full-time right now in Congress on a series of new stimulus bail out programs and that will give us that creamy filling. But John, the hard outer core by the fourth quarter, the headline inflation numbers are going to come back to haunt the Federal Reserve and to haunt politicians, but right now, politicians don't care because right now they are trying to preserve their jobs because everybody's job is up for a vote here coming up in November.
So like we say, this is the silly season. They are going to do every dumb and stupid thing possible to interfere in the economy, and what's going to be – depending on what the outcome of the November election is going to be, then we may have a very anemic recovery from the recession. The recession may last longer than the experts expect, and even when we come out of it, then they are going to enact, depending on who is elected, a whole series of things that are just quite frightening. And that's going to take us into another recession in 2010. And it will be the policy response made by government that will turn that recession into a Great Depression, but this time it's going to be hyperinflationary. [32:10]
JOHN: Yeah. In other words, we'll bail it out this time, but when they try it again, it will blowup in their faces. That's what's going to happen.
JIM: Yeah. And even though they are going to be able to throw enough stimulus, cut interest rates, I mean they are going to be chopping trees down and printing more money like you've never seen before, and it's just going to barely bring us out of a recession. In other words, you're going to experience stagflation, higher rates of inflation, anemic economic growth. And then they are going to make a series –depending on who is elected if they raise taxes, if they are talking about all of these massive regulations and programs. And we're not going to get into that in this program. We're going to wait until the candidates are confirmed in both parties and then we're going to examine their policies and then we're going to talk about exactly using historical precedent what has happened when you use these policies. And what I expect that we'll also be going into, John, is capital controls and wage and price controls because there will be a clamor from the public, just as they don't understand what's causing the inflation that they are experiencing in their personal lives, there will be a clamor to come in and freeze prices and freeze wages and, you know exactly what happens when you do that, John, you get shortages. [33:30]
JOHN: Could you explain to people how that works. As you mentioned that, it just really occurred to me, when we do try wage and price controls what is the steps. First of all, people say stop the price – freeze the price and wage. Next step, okay. The government does that. Then what happens?
JIM: Well, your producers stop producing. You see as a classic example is rent controls. Governments will come in to a local area and they won't allow landlords to raise rents and what that does is stop new supply. No landlord is going to go out and finance a new apartment complex and built it with the cost of money and then have the government tell them that you're going to limit them in terms of what you can produce. A good example of this is from China. In China, there are small oil refiners. They call them tea pots. These are refiners that produce maybe 10 to 20,000 barrels of oil a day. Well, in China, energy is subsidized, so you cannot sell gasoline products or diesel products at market prices because the government limits the price.
And so what has happened, and especially last year when we saw the price of energy go from $50 to almost $100, well, these refiners who have to import energy in the world markets could not import oil and refine it and sell it at a price where they could make money. They were losing money, so they stopped producing. And as a consequence, now, China is now going into the world markets and they are buying refined oil prices from gasoline to diesel to jet fuel.
And so there was a shortage that was created, and that's what happens. You stop production when you do this because no business is going to operate at a loss. You can't say, all right, we want you to stay in business, we want you to produce something and do it at a loss to yourself. I mean what happens, people just throw up their hands, they shut down their business or they stop producing. But that will not stop the politicians from appealing to the cries coming from people as they see their wages stagnate because their wages aren't keeping up with inflation. Employers, if you're a wage earner, you can't go into your boss and say, “look, my cost of living is up 10%, you're raising my taxes, so I need a 15 to 18% pay raise to stay even.”
And one of the reasons we did the Great Depression book with Murray Rothbard is the very policies that turned a recession and a stock market correction into the greatest bear market and greatest depression in history are exactly the policies that are being implemented, being recommended and are now being advocated by a broad group of individuals in this country and the consequences, we're seeing them right now when you talk about the inflation rates that people are experiencing. [36:25]
JOHN: Let me ask you a question. Is there a sort of a round two when the – you've got my curiosity here – when we start waging price control and government sets it into effect and businesses say, “oh, phooey on that, we're just going to shut down, we're going to lay people off” – unless they've prohibited that. Does government try to come back in and force business to do something? Has there ever been a historical record of doing that?
JIM: Well, they can try it. What you do is you get into rationing at that point because production stops, it's curtailed, shortages arise and then you have the government rationing. And I can see that. We're not too far away from that.
JOHN: So that's round two, in other words of the whole process.
JIM: Well, round two will be bailouts, more tax payer bail out of Wall Street and these homeowners. And what was amazing, John, when you looked at the defaults in 2007, over 60% of the real estate loans defaulted on had to do with fraud. In other words, when you got these no-doc loans, people were lying about their income to qualify for the loan. So, yeah, they talk about some of the abuse of the lenders, but you know what, there were a lot of people out there that were lying on their mortgage applications. I have a friend who works for a very well known national bank, and the abuse and the lying and the cheating that was going on in the loan process was absolutely amazing. And this friend of mine, they called him Dr. No because he turned away more mortgages and that was his job at this institution was find and make legitimate loans, find legitimate income, and that one of the reasons this particular institution does not have the loan write-offs and problems that some of the other banks did.
And it's absolutely amazing, but this is the world that we live in today, and yet the consequences of inflation – the symptoms, rising prices, if oil goes to 150, they will penalize the oil companies. They already have plans to do that, which means they will produce less.
And this is what happened last time they passed a windfall profits tax. Congress in looking back in their own Congressional study came to the conclusion the result of the windfall profits tax is that it drove our imports up, drove production down in the United States and caused us to produce less. So it's amazing. It's almost like no one has ever taken a history course or read history to see what happens. It's like we have short memories, or we think, well, this time we can do this better because we're smarter than those guys that did this the last time. And that's why, John, you are seeing as a consequence of all of this, you're seeing gold at 974, you're seeing silver at close to $20, you're seeing soy beans at 14. I mean there are consequences to these kind of actions, which is what Ron Paul was trying to hold Bernanke accountable saying that by doing all of this, here is the consequence; this is what's happening to the value of the currency; you're just going to bring more pain for the poor and the middle class in this country. [39:31]
JOHN: Yeah. I don't think they think – maybe some idealists think they can do it better. I think politicians just run before the wind, so to speak, and they don't care about next week, next month, next year. It's just “what do we have to do right now to keep this whole game afloat.”
JIM: Yeah. I mean right now, this is an election year, and the only thing they are worried about is maintaining their jobs and that's why they are coming with all of these proposals. And it's one of the reasons we're doing a gold show this week is why do you think the price of gold is at almost $1000? And as you will hear or at this part of the program if you listen to the roundtable why many on the roundtable feel that gold is going to 3 to $5,000.
JOHN: You know, I guess, as we talk about all of this, one thing keeps pinging in my mind, and that is you and I can sit here and talk about what should and should not happen. But we both know that historically governments and politicians go down this trail almost inexorably. So if there is one lesson that history is teaching us right now, we're condemned to repeat this because they are insisting on doing it right now. And that's where we're going.
So if we know that's where we're going, what are investors supposed to do? How do people literally defend their money, their retirement, their savings in an environment like this. And I'm predicting – I'm going to lay money on this – I guess I forgot who’s going to bet me against it – we're going to hear terms like “economic terrorism” in the near future. And that's going to be anyone who tries to defend themselves against the ravages what’s coming.
JIM: Obama has a bill called the patriot act, a bill where he's going to punish businesses if they don't do what he wants them to do. And John, that's already coming. And so that's why we've done this gold roundtable. The only thing you can do is protect yourself.
Now, people outside of the United States in Europe, in the Middle East and Asia understand this concept. They've gone through the ravages of inflation. They've gone through dictatorships. They've gone through tyrants, and that's why gold is held with such greater sanctity in these kind of cultures versus what is held here. I mean, you know, you've got commentators on TV, “gee, there is a commodity bubble” and they have no clue in terms of what is causing inflation. Or they'll say, “well, the oil prices are up. It's OPEC.” They don't understand what inflation is. And that's why I think you've got to protect yourself.
And there are two themes. We're going to be developing a new theme and pair that theme with an old theme that we've had. I wrote a piece going back to the year 2000. I said, look, if you want to make money in this decade and thereafter, you need to be into things that people need. So we talked about precious metals because of inflation, energy for peak oil and rising demand coming from China. We talked about water, which is a precious resource, food, and then I added infrastructure. Those are the five themes.
And what you're going to want to move away from is the age of consumerism in the United States is coming to an end. Are retail sales going to fall off a cliff? No. But gradually consumerism is going to decline a slow death. And the reason, John, is inflation and taxes. As individuals see the cost of living go up for chicken or for gasoline prices or utility bills, they are going to have to cut back. As the government raises taxes –depending on who is elected – as their tax rates go up and as inflation goes up, that simply means they are going to have less money to spend on consumer discretionary items. So that's a thing that we're going to be developing here and hopefully help you to protect yourself because if you're relying on government to protect you, you're going to be sadly disappointed, and you're going to end up in poverty, so the best thing you can do is fend for yourself because it's “history is doomed to repeat itself.” And we're seeing that unfold with such clarity here. People are going to see their savings wiped out – the value of their assets if they are in the wrong asset category; they are going to experience real impoverishment. [43:53]
JOHN: Yeah. You know something that's a side effect to this by the way we haven't mentioned today, and that is a vibrant underground economy not just for illegitimate things like drug running or something along that. And you're beginning to hear the rumbles of this from small businesses. Every small business person you hear talking in an interview lately over the last couple of weeks I've noticed the one comment they all make are: “taxes are killing me.” They make it all uniformly.
And the second rumbling, and you get this only by way of indirectly talking to people as people are going, okay, that's what the law says “now here's what we're going to do” –that type of thing. So that actually forces people into that position. I remember Ron Paul 25 years ago saying that as a congressman he believes in telling people to obey the law. But on the other hand, he said, when they get pushed into these circumstances, can you blame them for doing what they do because it's hitting the point when they [have no other choice]. So he said there is a real conundrum there.
JIM: Yeah. So we're going to start a series. One series that we're going to start up next is I'm going to take the Fed research papers written from 1999 to 2002, just to let you know where we're going with helicopter drops and the various things that governments are going to do. And like I said, we're going to repeat all of the great mistakes made during the Great Depression.
In fact, there is a great book written by John Thomas Flynn called The Roosevelt Myth, which just talks about all of the mistakes the Roosevelt administration made that lengthened the Great Depression and actually made it worse. And in fairness to Roosevelt, I mean, he just copied what Herbert Hoover did. And one of my themes for next year is get ready for Hooverization because it's coming. [45:40]
JOHN: And as we fade into the distance here at the end of the first hour of the Big Picture, maybe we should run a clip here from senator Jim Bunning of Kentucky who on Thursday challenged Ben Bernanke on the whole issue of unemployment and the fact that the Fed should have seen it coming.
BUNNING: The unemployment rate in the United States of America, and that moved from 4.9 to 5% in the fourth quarter. Where is it now? Where do you estimate it to go in the first quarter of 2008?
BERNANKE: It jumped in December from 4.7 to 5.0 which is a pretty significant jump and it was certainly something that we looked at.
BUNNING: Well, that was kind of indicated by the low growth rate and the reasonable expectation that the job rate would be higher unemployment in the fourth quarter. I'm asking about 2/08.
BERNANKE: Well, I recorded our projections for the fourth quarter which were 5.2 to 5.3% in the fourth quarter. We're seeing unemployment insurance claims rising, which I think is consistent with the somewhat higher unemployment rate going forward.
BUNNING: What are you telling me?
BERNANKE: That the unemployment rate is likely to go up from here.
BUNNING: How bad? Are you seeing 5.6? 5.7?
BERNANKE: The baseline projection we've made for the fourth quarter is 5.2 to 5.3, but there are downside risks. Things could get worse than that. We don't know, but it's not our main projection. It's just a risk that we see out there.
BUNNING: Then does that bode well with the lowering of interest rates in the higher rate of unemployment? That indicates to me that someone in the Journal today that talked about stagflation might be talking more sense than we might anticipate.
BERNANKE: Again, Senator, we're just trying to balance the risks of growth, inflation and financial stability. Monitoring policy works with a lag and therefore we have to –
BUNNING: I understand that very clearly. We should have lowered rates earlier and all of a sudden we lowered them 2.25 basis points. 225 basis point in less than, what, six weeks, eight weeks.
BERNANKE: It was 125.
BUNNING: 125?
BERNANKE: Yes, senator.
BUNNING: Well, if you count the fourth quarter of last year, what was the total?
BERNANKE: We lowered 50 base point in September, 25 in October, 25 in December and 125 in January.
BUNNING: And it was 225.
BERNANKE: Not in the forth quarter.
BUNNING: No. No. In total. In total since the last quarter.
BERNANKE: That's right.
BUNNING: That's considerable. And the market conditions indicated that that was absolutely necessary.
BERNANKE: I think so. The housing market decline and weakness in the credit markets were suggestive of the solid –
BERNANKE: The weakness in the credit markets, chairman Bernanke, were signaled last year early in the year. It didn't take a rocket scientist to figure that out. And I know with all of the great economists that you have on the Federal Reserve and your members of the Federal Open Market Committee are a lot sharper than the people sitting up here at this table, and you had a big heads up signal that the housing market was in the tank early last year.
BERNANKE: But the housing market was not affecting the broad economy. When we lowered interest rates on the last day of October, that morning we received the GDP report for the third quarter of 3.9%, which was subsequently revised to 4.9% and inflation was a problem. So in fact, I think as we look back on this episode, we will see that the Fed lowered interest rates faster and more proactively in this episode probably than any other previous episode.
As you point out, the unemployment rate is still below 5%.
BUNNING: I lived through the Greenspan years. I know exactly what you're talking about. [49:11]
JOHN: And the voice of senator Jim Bunning of Kentucky. You're listening to the Financial Sense Newshour at www.financialsense.com as the Big Picture continues.
JOHN: Well, Jim, you know, there are a lot of people who have jumped into doing financial radio broadcasting on the net, so what we try to do being one of the first shows ever out there is to stay ahead of everybody else and I figured out that we're going to try to improve the Financial Sense Newshour, keep the level of quality and professionalism, and what we're going to do next here is come up with a whole new concept for Financial Sense Newshour and incorporate the information that the financial channels display at the top and bottom of their picture frames into our radio program.
JIM: This is radio, and just how do you propose to do that?
JOHN: Well, it's not hard. For example, we need to have the network logo in the lower right-hand corner of the picture <sotto voce> “FSN, FSN, FSN”. So there you are. There you have the logo running constantly in your sort of audio picture here, and then you want to animate the logo so it sort of flips around, sort of like this: “FSN, FSN.”
JIM: Okay. Then what?
JOHN: Then we need market indicators displayed across the top of the screen just like they do on big things like Fox Financial and CNBC, so here goes.
[robotic voice] S&P down 13 points.
JIM: What?
JOHN: Wait. Wait. Wait. There is more. Then we add the ticker at the bottom of the screen here. Watch this.
The DOW down 1 ¾.
JIM: wait a minute. Wait a minute.
[Cacophony]
JOHN: Wait a minute. It's getting better and better. Now we have to add count downs on the screen to important metals report.
15 seconds until the metals report.
JIM: This is getting out of control.
JOHN: Okay, Jim. Now, do your market wrap –
[ongoing Cacophony]
JIM: What? I can't hear you.
[voices of Jim and John getting drowned out]
JOHN: I said do your market wrap.
JIM: Did you say the market is going to crap?
JOHN: No. Do the market wrap.
JIM: John, John, this isn't going to work.
JOHN: What? I can't hear you. If you don't do it, it's not going to work.
JIM: Turn it off.
[cacophony ceases]
JOHN: You don't think it will work, huh?
JIM: John, I think we're just going to have to jettison this idea.
JOHN: Oh, bummer. Can't even use a logo, huh. You know, a little logo at the top of –
JIM: No.
JOHN: All right. Back it the boring, ordinary, normal Financial Sense Newshour. [sotto voce] FSN. FSN. FSN. [mischievous laughter]
Other
Voices: Eric King, Analyst/Trader
JIM: Well, we’re off to another good start for the gold market this year, even though there’s been some corrections along the way. We’ve got gold prices just about $40 away from the $1000 mark; we have the gold indexes – the big boys – are up nearly 19% for the year. But it’s been a wild ride.
Joining me on the program this week is private investor Eric King.
Eric, I wanted to have you back this week on the gold show. Last time I had you on the show, I usually bring you on whenever there’s a major correction and people are jumping out of windows. I think the last time you were on the program was in the middle of January when we had quite a nasty correction in the last couple of weeks in January in the HUI. So I want to get your perspective because you’re one of the best chart readers I know of and let’s talk about this market technically because there are a lot of technicians out there saying we’re headed for a double top; some people are calling for a correction to go down quite a bit. So let me get your take of the charts right now.
ERIC KING: Well, I tell ya, the charts are interesting. And I say that only because from a longer term perspective you really do have gold extremely over bought. But let me say this also, that’s what happens in bull markets; they kind of surprise you habitually on the upside. And then of course in the gold market we seem to have these nasty shake outs as well. So I think that with regard to some of these stocks – I know last time we were on, Jim, we had the HUI had a nasty 13% correction. There are two issues with sentiment right now. And I find it kind of interesting – if you look at sentiment on gold and silver, I think we have gold at around 93% bulls, I think silver is 94% (silver is the highest it’s ever been in history I believe) so as they push towards the magic $1000 gold and silver $20 area, you know, some place up here, could we get a nasty set back and sort of shake people out and have a correction? I would say, you know, it’s quite possible. And so you’ve got people that are holding GLD or SLV and so you may have some people who try to kind of flip out of some of those instruments and maybe try to repurchase –those who are traders – at lower levels. I don’t know how high silver will go in here before we get sort of an intermediate top or how high gold is going to go. There are some red flags as I said with sentiment. We’ve got some kind of goofy money coming in to the metal market, too, but there’s also some selling going on so it’s sort of a hard read. It’s kind of an art form trying to pick a top. But you know in my discussions with some other folks, we really don’t see the manic behavior in certainly some of these juniors that have just been cratered; and we don’t really see a tremendous participation broadly by the American public or even by fund managers for that matter. So it tells me that, yes, we’re still somewhat early on in the bull market but also from a shorter term perspective we’re definitely going to have some hiccups and some type of corrective behavior as we go through here. Like I said, we’re very over bought on the longer term charts and with sentiment, again, being as bullish as it is on the consensus people should probably – some of the professionals may very well lighten their loads as we push to $1000 or through it, and on silver as we get to 20 or get through there (but, you know, then they’re gambling that they can buy it cheaper), so it’ll be interesting to watch. It’s one hell of a ride that’s for sure. [56:04]
JIM: What is it, Eric, technically that are about even numbers whether you’re looking at the S&P 500, you talk about a 1400 level for S&P; the same thing with gold. You can remember this gold bull market the 300 level for gold, then it was 500 and then we blew through 600 and it went all the way to 750. And so 1000, that’s a four digit number but it’s an even number. Technically, is that significant?
ERIC: I think the 850 was more significant because that was the old high and we breached it obviously, but to your point on the $1000 I guess maybe what you and I keep asking ourselves is – and I don’t want to speak for you, maybe you can pipe in on this, but when is the American public going to wake up to this bull market because they certainly haven’t yet. We’ve had gold up for eight straight years it’s been up. It’s outperformed every single major currency and yet we are just not seeing participation by the American public yet in a broad manner in this market. So I think when we talk about the significance of $1000, maybe $1000 will light some bells for people in the press or something will wake up people in the United States to want to participate in this – and I mean both on the fund level and on the investor level. It’s been a very quiet bull market. It’s just very quietly gone up – what has the HUI moved? Let me see where it is today. Of course, we’re doing this on a Wednesday, but it’s 485.90 and as you said last time people were worried because the HUI had pulled 13% and here we are at basically new highs, so that’s what bull markets do: They just try to shake people out, get rid of the weak hands. But this one has been interesting because it’s just sort of keeping the American public out of it somehow. And I don’t quite understand that, but I think we’re close to the public really starting to get involved and the fund managers starting to get involved. And then as I said also thought, the caveat to that is we’re sort of getting to some nosebleed levels on some of these charts on a longer term basis. [58:21]
JIM: Here we are, it’s February coming to a close, spot gold is up 15% for the year, spot silver up 30%, platinum is up nearly 40%, palladium is up 43%. We had a roundtable discussion this week, Eric, quite a few people on the program –and one of my comments and something you just mentioned is if you look at a chart, I don’t care if you look at gold, if you look at silver, if you look at the HUI, if you look at the XAU, they’ve been going up for eight years and my goodness, you would think, you know, after going up eight years it would have got the public’s attention; but so far, one of the members of the roundtable this week said, “I don’t think the public can spell the word gold yet.” Because it’s certainly not on people’s radar screens.
I want to get back to charts here for a minute. One thing that I’ve seen when you’re looking at long term charts (whether you’re looking at the HUI, you’re looking at actual bullion or the stocks themselves) a lot of people place a lot of emphasis on charts and that’s fine – but there’s one clear indication if you look at a long term chart that trend has been going up at a 45 degree angle.
I want to move into an area that sort of marches to its own different tune and that’s the juniors. And if you look at a chart of a junior they don’t necessarily follow the gold market. I know we get a lot of questions and emails on this show: “Gosh, gold’s up 20 bucks today but my junior didn’t go anywhere.” And I wonder if you might talk about, looking at charts as it relates to juniors as opposed to let’s say looking at a chart of let’s say an HUI Index, or let’s say a large cap stock like a Barrick or a Newmont.
ERIC: You know, that’s a great question, Jim, and I was wrestling with this the last couple of day because I was looking at some of these extremely over bought long term charts and that’s sort of been something for me that helps me sort of exit from some positions that I’ve had on the trading side, and then repurchase those. And I don’t normally recommend that for people, as you know, Jim. But what’s interesting here as it relates to the juniors is you’ve got gold really over bought on the longer term; and believe me it can get more overbought but you know, you’ve got these sentiment readings like I said that are very out of the ordinary for both gold and silver. And so as it relates to the juniors, the last time we were in this kind of a situation the juniors were flying. And I exited out of some of my positions and was able to buy those stocks back extraordinarily cheaper when we got into sort of the fear phase of the decline on the HUI. But this time, the juniors really haven’t done much of anything and so I’ve been trying to think, okay, what is a scenario that could possibly allow let’s say for maybe gold hits $1000, goes a little bit above it, and silver hits 20 or a little above it, but then eventually has some type of corrective activity. And it occurred to me that maybe like you said, gold, and we’ve talked about gold has been up for eight straight years, so let’s say we had a consolidation where things had to consolidate. If you started to see the majors and the mid-tiers pick up some of these juniors and make acquisitions and really get that phase going that could be a situation where we had sort of a stagnant gold market or a correcting gold market that could go on for some time, but at the same time create a favorable environment for the juniors. So they might say, well that’s crazy, How could you pull back on gold – have a significant pull back on gold and have the juniors do well. And I throw it right back at them and say, well, look, gold going from the mid-500 level to almost $1000 the juniors have sorted drifted lower and lower so we can’t correlate juniors necessarily to the HUI; we can’t correlate it to the price of gold and silver because they’ve been negative performers. So I think, you know, they’re on their own timetable and that’s what’s important for people to understand because – and we’ve talked about this before, Jim, but you get somebody who says “I can’t take it anymore. I don’t care what the price is just get me the hell out of these things. I don’t want to own them anymore. It’s getting scary. Gold’s correcting and now the HUI is correcting now and these things have been terrible.” And that’s sort of the last element to punch out of these things before they just sort of turn on their own timetable and begin to enter a bullish mode and begin to accelerate and get strong gains and have their own really experience which seems to be totally different from what the HUI and gold and silver are experiencing. So I guess what I’m saying is that there is a possible scenario there where you could have the HUI and gold and silver operating on completely different timetables, and juniors could go counter trend to them. [1:03:21]
JIM: One of the things that we have to deal with in terms of managing accounts when we go in and take a position in a junior, it can be quite sizeable, and as you know sometimes Eric, some of these juniors will go from trading when everybody is giddy and everybody wants to own them where the liquidity comes in they’re trading several hundred thousand shares if not five or six hundred thousand shares a day, and then all of a sudden everybody gets scared and the market dries up. And it was amazing because if you were looking at the charts of a junior, I mean there was one company that we wanted to own and December we held off because we knew there was going to be year end tax selling – it had been down – and there was a whole wave of tax selling that came in December and that gave us the opportunity to load and actually achieve our position in this company. And during that process what we did is absorb all the selling that came into this stock and you know, once we were done the sellers were gone and then in January when everybody wanted to own it, now that thing is up 25, 30 percent. So I guess the point that I would make is when you’re dealing with some of these companies as a junior where liquidity can change from a lot of shares being available to hardly any shares being available and all of a sudden you have somebody that comes in and wants to buy – an institution – you can change that whole chart pattern.
ERIC: You know, Jim, it’s amazing. And I guess...we’ve talked about this on other shows but people love a sale, you know. The wives will go out and hit Saks or whatever and things are on sale and you know, “I got Gucci,” or whatever the hell they’re buying for 50% off, but yet these shares go on sale and people don’t want to touch them with a 10 foot pole. In fact, they’ll wait till they are going back up and making new highs a lot of times before they’ll buy them. So I don’t really understand that mentality, I don’t think you understand that mentality and that’s what habitually hurts the investing public time and time again.
Now, what you and your fund did was the right thing because you guys were buying into the weakness, you were buying when there was liquidity, you got your position going. And all of a sudden the chart turns around and heading up and it goes from a bearish chart to a bullish chart and meanwhile the liquidity’s gone, so if somebody wants to buy in they’re going to have to chase the offers. And that’s another thing for people and they’re looking to get into a stock: Just buy it! Sometimes it’s like, “well, let me bid it an 1/8 lower or ¼ lower and they never get their position and the thing will go dollars higher. So if you want to enter a position, buy it. Try to buy it on weakness like you’re saying, try to buy, obviously, quality and try to buy things when they’re on sale. I think there’s a great opportunity for people on these juniors and a number of people have been discussing this because the smart money – the really smart money – and I don’t want to mention any names, but people are coming in with big, smart money and picking up large chunks of these juniors. And it’s the smart money that’s doing it. I don’t know who’s doing the selling; I don’t know if it’s the hedge funds shorting because they’re long gold and they’re trying to do some kind of naked short sell hedge program with juniors – which I’ll never understand. But I don’t know who it is that’s doing the selling. But like you said, there’s liquidity and people need to take advantage of it and buy into those things. If they’re not sophisticated though, then they need to go into a fund like a number of times I’ve mentioned John Embry over there at Sprott, and you have a fund, Jim, because it’s so important to be in quality with the juniors. [1:07:00]
JIM: When we talk juniors –about how they’re a little bit different, they have their own cycle as you made reference to – when you’re investing in a junior, Eric, it’s not like they’re a producer so, you know, every quarter a company can announce, okay, this is how many ounces we’ve produced and this was what our profit was, or the cash flow per share. But another metric you can look at is, all right, out of every dollar a junior raises, let’s say 75, 80 cents goes into drilling or goes into exploration, what are they finding gold at? So let’s say they’re finding gold at a cost of $15 an ounce, $20 an ounce and they’re going to spend $10 million, you can sort of look at these companies and say, “well, last year they spent $10 million, they found gold at roughly $20 an ounce, they’re going to spend $10 million this year, this is what their ounces should be,” so you could almost look at forward ounces because you can’t look at a junior and say they have earnings and cash flow. Producers have that. So juniors have their own different metrics and you’ve seen this on many of the juniors where you can have a company and I can think of a company like Aurelian that sat there for two years, they were proving out the property, they were exploring the property and for almost two-and-a-half years the stock of Aurelian fell. Each year it hit a lower low. A lot of people were upset, they sold it, they got out of it and then all of a sudden the market wakes one day and says, “Oh my God, this is a heck of a project,” and then the rest is history. I mean that is just the way things go in juniors. We had a uranium stock on the day you and I are talking they just made a new discovery and they’ve been drilling this property, it was up 126% in one day. I mean that’s what happens to juniors. And I think if people are going to get in this sector, they want to own quality, they want to own a number of juniors. But also, wouldn’t you say you also have to be patient?
ERIC: I would say you have to be patient but that really is the whole key isn’t it with juniors, Jim, when you look at that? And I’m kind of going back a little bit to I was talking to Sean Boyd today from Agnico-Eagle about his company and the subject of Canadian banks came up, and we’ll go into that later in this show, but these banks like you said will really just torture shareholders in these stocks. And the funny thing about that is it kind of drives people insane because you almost have to have the patience of Job and just be able to sit through torture and kind of have a happy ending. And it’s set up kind of that way on purpose because when these things go, when they really start to go, it’s not going to have anything to do with rationality, it’s not going to have anything to do with fundamentals and I say because the junk will be going, the scams will even be running. And they’ll be going to prices that are astronomical that don’t make any sense at all, so this long process – and this is interesting in this bull market, isn’t it? Because here we have gold taking off and the HUI is taking off and everything is going so well, and the juniors are cratered. And it’s almost like they’re just trying to get the last of the weak hands to push the sell button and get out of these things and maybe they can cover some of their shorts and then when the time comes they’ll just let them rip. And when they go, they really go. And then people start seeing that they’re going and it’s you know, let me buy a pull back, and you know, it’s the pull back that never comes, Jim. And it’s opposite side of the coin; right, Jim? Because then it’ll be: “I sold it and I didn’t care what the price was and I’ve been waiting patiently Mr. Broker to get back in to this thing, but you know what, I can’t take it anymore. I don’t even care that it’s up there. Just buy into buy into the thing for me.”
Well, what’s that thing, Jim? That’s the intermediate top or the top. So it always seems to be the public does on the wrong side of the trade, and if they just buy quality into weakness during bull markets, that’s the way to really, really accelerate their gains in the bull market. But it takes guts, it takes courage. And it takes almost a belief, like religion. You have to believe in the bull market to do that. When everybody is afraid around you, when everybody is frightened and we’ve done some gold shows, Jim, and roundtables and it’s been the epitomy of fear in the markets, you have to believe. If you don’t believe, if you really don’t believe, you can’t do that! You can’t have the courage to step in to that stuff and buy it and take those positions and hold it for the long term. You’ve got to be a believer in order to do that, and that sometimes is what hurts the investors. They just don’t believe. And it’s a big bull market and a long bull market and they need to stay patient like you said. [1:12:03]
JIM: it’s absolutely amazing, I think sometimes if people would treat their investments in the sector much like they do their homes – Eric, if you and I were looking to buy real estate and let’s say we know right now that real estate is selling off, prices are going down, home owners are losing, foreclosures are up, there is a definite bear market in real estate. But if prices are weak, and let’s say that you wanted to for example buy a house in a certain neighborhood, you didn’t want to buy it because maybe say it was out of a price range, now the thing is selling at a 30, 40% discount, you know what you would do Eric, you’d be jumping on that home, you’d buy it, you’d take advantage of the marketplace, but as you mentioned, it’s just like people go shopping, if they put something on sale at Nordstrom’s or Coach or Gucci or something, you know, they’d be flocking around. It reminds me during Christmas at one of the outlet malls, Coach was having a special with $25 off, and they discounted their purses, Eric, there were lines outside the store. When they do the same to juniors and they discount them, 40 to 50% below market, people shy away and they come back and say, “call me when it’s selling at a 50% premium and then I’ll go in.” And it’s almost the opposite because we get flooded with money any time the market goes up like it is right now. Whereas the time I wish we would get flooded is the time when the market is weak which is usually by the time when they’re having a big correction, and things are really bad and people are jumping out of windows. Usually, we’ll have you on the show and you’ll tell them, hey, go kick a soccer ball, add to your position. That’s what we were saying in January and here we are it’s February, stocks are higher.
ERIC: But we’ve done that for years, Jim. We’ve been saying that to people for years on this show. And one of the key points, and I’ve always stressed this – at least I think it’s important – is if you’re buying quality and let’s just say, Jim, you went and bought something in the bull market yourself personally. Newmont may or may not be something you’d want to own, but let’s use Newmont as an example, say the stock pulled back from $60 to $35 and you went ahead and bought the company. It really doesn’t matter if the stock pulls back more for you – and let’s say it went under $30 briefly, to 28, $29. And let’s say you made a worse entry point than that. Somehow you were in at $45. Look, if you make a bad entry point but you’re buying a significant pull back and buying quality during the bull market, if you make a bad entry point the bull market will rescue you later on. That’s the good news. But that’s where the faith comes in. The faith part of it: You’ve got to have faith that it’s a bull market; you’ve got to understand the fundamentals; understand why it’s a bull market and understand that when things are on sale and when people are frightened to death and let’s say you’re going to buy something and you feel like before you do it maybe you need to take a trip to the restroom, that’s probably a pretty good time to buy, right? [1:15:07]
JIM: It’s amazing when it comes to investing that people feel much more comfortable buying something when it’s going up, in fact, the noted technician John Murphy who typically buys things when they break out on the charts, but he said, “it’s almost works for the opposite when it comes to gold.” You’re better off buying it when things are going down than when they’re going up. And that’s because when things turn around in the gold market they can do so very quickly. I mean we had mid-January we had that 13% correction and you know, within a matter of days we were making new ground. So you know how quickly this market could turn on a dime, and I think it’s Bill Murphy who’s favorite saying is “you’ve got to be in it to win it.”
Now I want to talk about investing. You know, the thing that amazes me is as you look at the junior sector, I mean if we were talking about General Electric you’re unlikely to get on the phone and get Jeffrey Immelt, but with the junior sector I highly recommend that if investors want to get information on a company, they go directly to the company’s website. I mean go right to the horse’s mouth. That’s the best place to get information. And secondly, you can pick up the phone with most of these companies and call the top execs, the president of the company and they’re happy to talk to you. You know, maybe they issued a press release, drill results you don’t understand. Pick up the phone, do your research, your homework.
A lot of people go to chat rooms and I think they’re a lousy place to go because you’ve got a lot of manipulation; the one exception, there is a new chat room out there, it’s called Agoracom (www.Agoracom.com). It’s probably the only legitimate chat room that I’ve seen out there, none of this bashing, none of the pumping or rumor-mongering that you see on Yahoo or Stockhouse and so I would say generally I’m against chat rooms but Agoracom is one company that is cleaning this process up and they’re doing it right. So I want to make an exception there.
ERIC: Well, I don’t want to spend a lot of time on the question of chat rooms, but let me say this, and obviously this is to the non-professionals that listen to your show, the institutions, this is to the small guy: Don’t go to the chat rooms! Don’t do that! Don’t subject yourself to that if there’s a correction. Well, for god sakes, let me go to some chat room to get some information and you’ve got some guy on there who’s you know for whatever reason putting a bunch of derogatory stuff on there because he’s sure trying to push the stock down and wants to buy it cheaper so he’s trying to create more panic, which is illegal but is done, and people and caught from time to time. Don’t go to those chatrooms. Don’t do that. Stay away from them, stay out of the chat rooms period and permanently for this bull market. Go to quality places like you said, Jim, the website; people can listen to your show; there are other websites that people can go to for information where articles are published such as Kitco etc. So stick with the fundamentals. Stay with the fundamentals; stay away from anything that’s going to cause you to have indigestion when there’s panic because you don’t want to add to that, you want to keep your head straight. Almost like a filter, keep the negative stuff out of your head, keep your head clean and your mind clean and just make sure that you’re focused on the fundamentals. And like you said, Jim, go to the websites. If things aren’t good in the gold market, go back to the websites. Look at the investor presentations. As you said, Jim, run through those and remind yourself why you own that company in the first place. And ask yourself: the price has changed but fundamentally has anything really changed fundamentally with this company that I’m in. And if not, and it still has great fundamentals I wouldn’t sell it. If you’re planning to be in it for the long term stay in it. [1:19:93]
JIM: As we come to a close, Eric, any bit of advice for investors. What are you doing, any recommendations?
ERIC: You know, it’s interesting, we talked on the gold side and I think that it was interesting today – this was from Bloomberg – but the bottom line is that the Fed is basically saying that they are going to cut interest rates because the bottom line is we’re not going to worry about inflation right now because this slow economy poses the greater threat. Over in Atlanta they had 10,000 people trying to get a job at Walmart. I mean it’s just insane out there what’s happening in the economy, how bad it is. So they’re going to keep cutting rates and so you have gold kind of marching forward, but again it’s in this parabola – meaning should people be running out today and pouring into GLD or SLV? Again, it’s better to buy those things on significant corrections. If you want to buy physical gold and physical silver, I think both you and I both agree, Jim, in the end gold and silver are going to be a hell of a lot higher than they are today in this bull market. But again, buy when there’s significant, major corrections. Buy into that weakness if you want to pick up physical silver or physical gold. Yes, the fundamentals say that gold and silver will be a lot higher, but again on some of these longer term charts we’re in this over bought phase and sentiments get a little bit goofy. So, you know, try to buy the corrections I guess is what I would say on the physical side.
With regard to equities, July 21st last year I recommended Agnico-Eagle to investors in the low 40s. Let me look at it. I think the stock today – and again, we’re doing this on a Wednesday but I think the stock