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The BIG Picture Transcript

  Part 1

 The Confidence Game

JOHN:  Well, I hate to say this but you and I need to talk because we got some real bad problems here, and we have to fix these things.  You see here’s the deal.  We always try to take vacation time off right around the end of August.  We keep saying, “well, we’re going to take the last two weeks of August off.”  Now let’s look at the track record on this thing.  In 2005, there was a hurricane so we had to hurry back to cover the hurricane and its effect on the markets, notably in the area of energy.  2006, off goes Jim to the beach and what happens is there’s a big sell-off in resource stocks and Fed rate hikes as well.  In 2007, Jim goes to the beach, John goes to Canada:  Credit crisis.  In 2008, oh my God, Russia invades Georgia and there’s another sell-off in resource stocks, and things are going hooey-hooey in the metals market.  So we’re going to have to rethink what time we take for vacation every year because either our timing is bad or there is a conspiracy to see that we don’t take a vacation.  I don’t know which one but I guess there they are.

JIM:  Well, we could always try October, but you know, October has never really been a good month either.

JOHN:  Whatever has gone wrong for the stock market in October?

JIM:  But you know, in all seriousness, John, we’re going to be taking a couple of weeks off and unless, I don’t know, Russia invades Kazakhstan next, or we get hurricanes – if something like that happens we’ll be back.  But this is probably going to be one of the more important shows that we have done I would say since the beginning of the year because we’re going to be talking about some things that you’re never going to hear in the mainstream press, and one of them is going to be our first topic today which is the confidence game; and then something else that we’re going to be covering in the first part of the Big Picture is there were two reports that came out this week.  One was the Interagency Task Force that was given the responsibility of looking into the run up of energy prices.  That report was released this week, and we’re going to see if we can post it on the web.  The other one is the mid-term outlook that came out by the International Energy Agency.  Both reports, done independently, corroborate each other; and so one of the topics that we’re going to talk about is what’s behind higher oil prices. 

In the second hour of the Big Picture, we’re going to talk about The Great Game, what is going on in Georgia, the implications for the energy market, geopolitics and we’re going to replay an interview which was done in 2004 with Lutz Kleveman who wrote a book called The New Great Game, and outside of perhaps missing out on how high energy prices were going, Lutz pretty much laid out the very same things you’re seeing go on in Georgia with the Russians.  Then also coming up in the second hour:  Eric King will be joining us in terms of we’ll be talking about what’s going on with the precious metals.  There’s also something going on in the physical market which we talked about earlier in the week, John, when we talked to Jeff Christian in South Africa on the Platinum Group Book which CPM just published. 

So there’s a lot of threads, a lot of important topics, and as I mentioned, this is probably going to be one of the more important shows that we’ve done all year.  So let’s get into that.  [3:47]

JOHN:  All right.  Let’s do that.  Over the last few weeks we’ve seen a sharp rally in the stock market; financial stocks did well; commodities and commodity stocks sold off at the very same time.  The media have been declaring that the commodity bubble has burst, it’s over, that things are on the mend in the US.  But also according to this legend that we’re hearing, the economy is supposed to improve in that things are going to get better by the year, especially now that oil prices have fallen back.  And of course, there’s a lot of not yelling and screaming, but cheering and applauding about that.  Well, that’s what you hear when you monitor the talkies here in the studio, which we do all day long, five days a week.  But I would guess if I knew you better, you probably don’t buy into that.

JIM:  No.  I don’t buy into in it.  In fact, we’ree down at the beach here for the month of August and there is a resort hotel and a coffee shop – every morning I go over there and I get myself a cup of coffee and I also pick up a copy of the Journal, Investor’s Business Daily and some of the other newspapers.  And John, through this run up from the time that oil was at $20 a barrel, when gold was at 255, when silver was at 3.50, none of the financial pundits nor the did the financial media – they missed this entire run up.   So when I take a look at newspapers from USA Today to some of the other publications and they are broadly proclaiming the end of the commodity bull market, that to me was a very tell-tale sign because if they didn’t get it when it began seven years ago, they didn’t get it along the way.

And John, how many shows have we down?  Every time we hit new levels and particularly huge spikes in the price of energy, whether it was 2005 with Katrina and Rita, or the recent spike with the credit crisis over Bear Stearns when the metals prices hit over 1,000 – they didn’t get it then.  And so this happens almost every single time that there is a correction especially after a sharp run up which we’ve seen since last summer – you’ve got to remember what was it, right around this time last year, gold prices were at 650 and they went from 650 all the way up to almost 1,040.  And we’ve had quite a few corrections over the last seven years and the response has always been the same:  It’s over, prices are headed lower, more good times are ahead.  What I find fascinating is that for example, when tech stocks were skyrocketing as they were in the late 90s, or when real estate was going up double-digits as it was in this decade until the credit crisis burst and it was soaring – you notice they never called it a bubble nor did they see it bursting.  However, whenever commodity prices rise they refer to it 1) as being unusual, and 2) oh, it’s a bubble.  Now, they’ve been predicting lower energy and commodity prices for the last five or six years.  They didn’t see the commodity bull market when it began, so it’s not unusual they would want to say it’s over; nor is it unusual, by the way, that they would keep calling for a bottom in financial stocks.  It’s almost every single week it’s the mantra:  “Have we hit the bottom in real estate?  Have we hit the bottom in financial stocks?  Should you be buying financial stocks?  Is energy in a bubble?  Are commodities in a bubble?  It’s so repetitive. And once again, if they didn’t see it when it began, what is the likelihood that they would see it when it ends.  [7:24]

JOHN:  So basically you don’t believe that the bottom is really in when it comes to financial stocks or the economy for that matter.

JIM:  No, I don’t.  In fact, I believe the worst is yet to come.  But there is a confidence game – if you want to understand the big picture, there is a confidence game that is being played by the government and their central banks.  The official pronouncements that the worst is over is ridiculous.  And I’ve got a couple of quotes.  I haven’t written probably in over a year –and I’m thinking actually by the end of the recess of putting out an article – and I want to give you just a couple of posts – now this was from last year, this was Treasury Secretary Henry Paulson who delivered a speech, an upbeat assessment on the US economy, saying “growth was healthy, the housing market was nearing a turnaround, all signs that I look at show that the housing market is at or near a bottom.”  And this was a speech that Paulson gave to an economic group. 

Then you had Ben Bernanke’s testimony last year – remember, the Fed gives testimony twice a year – in February and March – and also in the June, July period.  It’s a semi-annual testimony, and we usually cover them here on the program.  But this was from last March when Bernanke said that “at this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”  And then of course, Paulson later on this year said – and this was right before Bear Stearns hit – “We’ve got strong financial institutions, our markets are the envy of the world, they’re resilient, they’re innovative, they’re flexible and I think we move very quickly to address situations in this country.   As I’ve said, our financial institutions are strong.”  We’re going to talk about in this segment, instead of strong they’re actually weakening.  So once again, these guys didn’t have a clue. 

And John, what is it, you have a saying?   [9:22]

JOHN:  If they didn’t see it coming, they won’t know what to do when it gets here.

JIM:  And I’m thinking of putting together a list of pronouncements – either from Congress, from the Treasury or from the Fed, all along the way.  It was obvious these guys didn’t see this thing coming, nor do I think they really have a handle of how they are going to deal with this.  So what we have here when you look back over the last two years, you read the speeches that come out from government, it’s obvious that these people don’t have a clue as to what’s going on here, and I also think anyone, either in Washington or on Wall Street, knows where the next shoe will drop.  We’re going to get into where those possibilities are.  For one thing, our system is way too complex.  If the top CEOs of our biggest investment banks didn’t see it coming, think how clueless the government has been.  Have you ever watched the semi-annual Fed testimonies?  We have people in Congress on the Committee that don’t even know the names or the background of the chief officials at the Fed or the Treasury.  John, let’s go back to the July clip with Bernanke on Capitol Hill, and I’m trying to think of the Congresswoman who didn’t even know his background.  [10:37]

JOHN:  Right, Jim.  You’re talking about Democratic Congresswoman Marcy Kaptur from Ohio.  Here’s the clip.

Rep. Kaptur:  Seeing as you were the former CEO of Goldman Sachs, what percentage level of investment, were you not…

Bernanke:  You’re confusing me with the Treasury Secretary.

Rep. Kaptur:   Have I got the wrong firm?

Bernanke:   Yes.

Rep. Kaptur:    Paulson.  Oh.  Okay.  Where were you, Sir?

Bernanke:  I was a CEO of the Princeton Economics Department.

[audience laughter]

Rep. Kaptur:  Oh, Princeton.  Oh all right.  Sorry.  Sorry.  I got you confused with the other one.  I’m sorry.  Well, I’m glad you clarified that for the record.  [11:05]

JOHN:  That reminds me of what Ron Paul said a couple of weeks ago, Jim, is that some Congressman walked up – one of his colleagues – and said, “I thought our money was backed by gold.”  And I was sort of like, oh my gosh!  And the thing that you think about is:  “And these people run the country and make the laws!?”  So you don’t think this crisis is over and probably I would say the worst is yet to come.  And if you’re correct, then it would just seem logical why CEOs in the financial sector and politicians keep repeating that the worst is over, we’ve hit the bottom or things are going to get better going forward.  That’s more propaganda than it is anything else.  So let’s get into the details of where we are right now.

JIM:  If you wanted to understand what’s going on in the financial system, you have to understand the concept of money and credit.  I approach the markets from an Austrian business cycle perspective; others – especially on Wall Street – take a look at this – one prominent institution Bank Credit Analyst have referred to this as the Debt Supercycle.  What we have experienced if you take a look at over the last three or four decades, and especially since we abandoned the gold-backing of the dollar, is there is an increasing tendency to inflate out of every business cycle.  Every recovery coming out of a recession has required more ways for the authorities to reflate in order to avoid the pain of the previous reflations.  So instead of allowing the economy to heal itself naturally, the government steps in and bails out speculators from all of the excesses.  Just taking a look at the last two decades, we bailed out countries, companies, banks – and now we’re bailing out speculators and over-leveraged homeowners. 

And John, this is just the beginning.  I mean we’ve already had one helicopter drop this year.  More helicopter drops are coming, more bailouts are coming.  However, when you do these kind of things, there’s a trade-off; and that trade-off is in every reflation that we have seen over the last couple of decades, public and private sector debt has risen with our financial system becoming more leveraged in every decade.  You can see this when you take a look at debt to GDP, you can take a look at outstanding debt, total debt, unfunded debt.  So in every recession, instead of lowering debt, we’ve increased it as a result of falling interest rates which are usually triggered by the Fed.  And what we’ve seen now is the debt load is never purged, it just keeps getting bigger and bigger.  [13:52]

JOHN:  So basically what this is doing right now is postponing the problem, making really each new crisis bigger.  It’s sort of an accelerating type of process, which is really what we’re seeing now.  At every point, they try to then put it back to bed by saying we’ve reached the bottom and it’s going back the way it was, but it really doesn’t.  It just turns around and goes up for another round.

JIM:  Exactly.  And that’s all we’re doing.  If you take a look at this from an Austrian business cycle theory perspective, the only way to postpone the eruption of a crisis is to expand the level of credit and money in the system, but eventually the day of reckoning arrives.  That day of reckoning can happen in one of three ways.  Either, 1) the rate of credit growth slows down or stops, or 2) credit growth does not expand fast enough to prevent the effects of a reversion, or 3) the rate of credit expands to the point that people realize that the rate of inflation is certain to continue growing and there becomes a widespread flight towards real goods as people realize money is losing its value.  That’s what I think you have seen here. 

As we talked about last week, we’re probably in the US in the first phase of the hyperinflation and that is where I believe we’re heading.  Inflation has been rising – just look at the CPI numbers this week, the highest inflation numbers in 17 years.  I’ll get to the talk about deflation because there’s a set up that’s taking place here and we’ll tell you how this works, but if you take a look at the CPI numbers which came out which are tracking at 5.6% year-over-year, the highest rate in 17 years – I think that figure is going over 6 – and if you read people like John Williams over at ShadowStats, that figure is probably closer to 10%; and if you look at the rise in commodity prices over the last seven years.  So you’ve got the sign that people are looking for something that’s tangible and you know, you can take a look at all currencies – whether you’re looking at the dollar, euro, the Canadian dollar – all currencies are depreciating against gold.  [16:04]

JOHN:  But Jim, they keep telling us that inflation is a lagging indicator and that it’s eventually going to decline as the economy slows down.  I didn’t think this went up.  Okay.

JIM:  Well, first of all, they’ve been telling us that that’s a lagging indicator.  They’ve been telling us that for two years as US economic growth has fallen.  Remember, US economic growth peaked in the first quarter of 2007.  This is all part of what I call the confidence game in an effort to keep the people fooled.  You know, it’s kind of like the core rates of inflation they keep talking about.  They may be fooling the people, but they aren’t fooling the big bond investors like PIMCO who see a transformation taking place here from an era of disinflation, morphing into an inflation.  In fact, there are others besides PIMCO, even Bank Credit Analyst have said that we are leaving that era of disinflation and now are embarking on a period of inflation.  Now, how do you reliquify the system and reflate at a time you have rising prices?  And that’s what’s making this more difficult for them, so you had a concerted effort here to try to hammer and bring down commodity prices.  We’ll get into that later on. 

Now, if you follow the logic here, they’re saying commodity prices are weakening because of slowing economic growth, but at the same time economic growth is going to go up because of falling commodity prices.  Well, you know, folks, you can’t have it both ways.  If we’re slowing – which I believe is the case in developed countries – and I want to highlight that,  developed – mainly in western countries like Europe, Japan, the US.  You can’t just look here and what is going on in the US, the world is a much bigger place today and economic growth continues elsewhere in the world, where 3 ½ billion people live.  So you can’t just look at what is going on in the US anymore, you have to start thinking globally; and we’ll get into that in terms of the implications for energy in the second part of this hour.  [18:37]

JOHN:  Why do you think then that the financial situation is going to get worse and not better?

JIM:  If you take a look at over the last two decades, we’ve had three crises.  We had the S&L crisis and recession in 1991, we had the tech bubble in 2001 and now we have the credit bubble.  Now, two of these crises are very similar.  The 91 crisis and the present one have their roots in real estate – a point I want to come back to in just a moment.  But when the tech bubble burst, corporations deleveraged and rebuilt their balance sheets.  In the current downturn, what you have now is the financial sector is in the process of deleveraging and that is going to spill over into the consumer sector, which will be the next sector to begin to deleverage.  And this has broad implications, not only for the economy but also translating into a sharp fall off in discretionary spending.  [19:12]

JOHN:  So the commonalities here really center around real estate, which – well, I guess from what I’m reading so far – is far from finding a bottom, even though they’d like to proclaim it that way. 

JIM:  Oh absolutely, because residential real estate has been declining for two years now, and there is no evidence anywhere of any signs of a bottom yet.  In fact, if you look at past cycles as a yard stick – and this is one of the more severe cycles at least that I’ve seen in my 30 years in the investment business – we shouldn’t probably see a bottom until well into next year at best.  There’s a lot of inventory that has to be cleared. Unfortunately for the banking sector foreclosures are accelerating.  People are so upside down on their mortgages that they are simply just walking away in droves.  There are more foreclosures and that means more inventory to unwind and that means steeply discounted prices on real estate as banks dump property. 

I want to go through a couple of statistics.  A friend of mine in Orange County sent me a notice here of trends in LA County and Orange County, and this is notice of defaults.  In Los Angeles, there were 999 notices of default in January, by March it was 1383, by May it was 6,417, June it was 6,090; in the month of July alone, it was 6,646.  In Orange County in January, it was 305, in May it was 2200, and it is close to 2000 in July. 

Now, the Wall Street Journal did a piece this week and they talk about the outlook is bleak.  What they did is they took 25 metropolitan areas and they talked about the overall strength, they talked about how many months of supply of inventory, they talked about the employment outlook and they talked about the number of loan payments that were overdue.  This will just give you a sample of what’s going on in the country and why we’re not even close to a bottom.  In Atlanta, there are 13.4 month’s worth of supply and over 5.4% of loan payments are overdue.  If you go to Orlando Florida, they have 21 months of supply of inventory of homes and 8% of all loan payments are overdue.  If you go to Phoenix Arizona, 13 months of supply, 6% loan payments overdue.  Portland Oregon, 9.4 months, 3%.  If you go to Minneapolis St. Paul, 10.7 months of supply, 4% of mortgages overdue.  Charlotte North Carolina, 11.3 months, 4% of mortgages overdue.  Chicago, 15.4 months of supply of inventory, 3.8% overdue.  If you go to Tampa Florida, where most of the highest inventory levels are recorded, 17.1 months of supply, 6.3% of mortgages overdue.  Miami, Ft. Lauderdale – here’s a whopper – 37 months of supply, 3 years worth of inventory, 9.2% of the mortgages outstanding in that area are past due.  Detroit, 18 months, 5.3%.  Jackson, Florida, 15 months, 6%.  New York, metro Long Island and Queens, 14.2 months.  You’ve got Las Vegas 18.6 months. 

John, this is just giving you a sample of how bad this is, so as you see more homes come on the market, more notices of defaults, not only is this going to impact – for example, here in California – earlier we were talking to Peter Navarro – where we’re going to have record deficits but also it means lower revenues for states and it also means that the amount of losses – we’re not even close to finding a bottom in the financial sector.  And you know, for practical purposes the financial sector is insolvent.  [23:38]

JOHN:  So we still have a ways to go from here, and if that’s true, what will this mean for future losses to the financial sector?

JIM:  Well, if you take a look at the last real estate crisis – the S&L crisis in the 90s – you had about 1500 banks that went under.  So far this year, I think the number is somewhere between seven or eight.  Now, the FDIC has about 90 banks on its troubled list and I don’t take that with any degree of comfort because remember, IndyMac wasn’t even on the troubled list when it failed.  If you look at independent credit and risk agencies, they believe that the number of troubled banks is probably somewhere in the neighborhood of between 600 and 700 banks that are in trouble right now.  Now, here’s something to think about.  Since FDIC only has about 53 billion in their fund, of which IndyMac will consume anywhere from 4 to 8 billion, that doesn’t leave much of a cushion to protect the remaining troubled banks, the six or seven hundred. 

If 6 to 8% of our banks are in trouble, and there are close to 7 trillion dollars in deposits right now, what is more startling is almost 2.6 trillion of these 7 trillion dollars in deposits are uninsured.  In other words, these are people who have larger amounts of money in the bank than would be covered by the traditional 100,000.  We’re going to get to some actions people need to start taking here.  But given the fact that banks only have about 300 billion dollars on cash - because remember, we operate under fractional reserve system – and if FDIC only has 53 billion in cash backing deposits, you can see why regulators aren’t sleeping at night.  A few bank runs like Indy and we could quickly find ourselves in another crisis here.  If a large institution like a Washington Mutual or a Wachovia were to go under, there wouldn’t be enough money in FDIC to cover.  So in the end, John, just like in this housing bailout package, the taxpayers are going to be on the hook for all of this.  [25:48]

JOHN:  What about the problems with Fannie and Freddie and the big investment banks; I notice that this morning that Vladimir Putin –who used to be the president of Russia and seems to be functioning as the president of Russia right now – was threatening to dump all of Russia’s investments in that, as a threat to the United States.  So this has geopolitical implications as well.

JIM:  Oh absolutely.  I think – what is it – one out of four mortgages are owned by foreigners.  Foreigners own nearly a trillion dollars of Fannie and Freddie.  So the point here is more trouble is coming to the sector, and after losing much of their credibility the bond rating agencies have been accelerating the pace of downgrades in the mortgage sector.  For example, if you look at this time last year in the third quarter, they had about 85 billion dollars of downgrades; if you take a look at the most recent quarter, the second quarter, it had risen to 841 billion dollars, so they’re up almost 10 fold from where they were around this time last year.  Now what does that mean?  It means more downgrades, meaning that bank portfolios are going to be hit by more losses which forces them to improve their capital ratios.  That means that they’re going to need to either 1) divest more of their assets, or 2) raise more capital.  So what’s ahead is going to be much more severe than what we’ve seen so far. 

For example, if you take a look at “for market” Index, there’s a home equity credit index which is basically double-A rated paper on swaps and asset-backed paper, these mortgages or swaps are selling for 10 cents on the dollar, while triple-A is selling for 50 cents on the dollar.  So write-downs are going to get much worse, and as far as Fannie and Freddie you have almost half a trillion of adjustable-rate mortgages that are going to get reset this year.  So most of the foreclosures and the writedowns aren’t going to peak until probably somewhere in the middle of next year.  If you remember, just a moment ago I was talking about the number of notices of defaults that have gone up just in Los Angeles County and Orange County since the beginning of the year.  So if real estate prices continue to fall, as they’re doing now, not only does it mean more foreclosures but it also means bigger losses yet to come.  According to the Mortgage Bankers Association – this will just give you an idea of how bad this is – they reported that 2.5% of total US mortgages were in foreclosure and nationally 6.4% of mortgages are delinquent; so if you apply those kind of percentages to Fannie and Freddie, which insure or cover 5.2 trillion in mortgages, it would imply losses at these GSEs that are going to approach somewhere in the neighborhood of over 200 billion dollars.  Now, remember, when they foreclose on a property, the losses aren’t zero.  They put the property for sale and they recover it.  So assuming they recover anywhere from 40 to 50 percent, you’re talking about almost 100 billion dollars of losses coming – which is well beyond their capital.  In fact, it was one of the Fed governors – I think it was Fed Governor Poole who said basically Fannie and Freddie are technically insolvent, and for that matter the entire banking system is insolvent.  The government, the White House, Congress, Treasury, the Fed – even the FASB – are basically playing a confidence game with the public, and that’s why you need to choose your banks carefully. 

And please, if you’re listening to this show, do not keep deposits over $100,000 at a bank.  I recall once again that conversation, the week – the Friday – that IndyMac went under, when my wife was in Phoenix airport where an elderly woman was trying to convince her friend who had quite a bit of money at one particular institution – and this institution I’m not going to mention the name, it could be the next institution that goes under – and she was trying to convince her friend that the high interest rate she was getting was for a reason because this was a troubled institution, and she needs to get her deposits down to 100,000 just in case they failed.  And there was an older gentleman who also joined in on the conversation.  [30:15]

JOHN:  Is that $100,000 – and this is important to ask – remember, at one time, it was $100,000 per account, but at one point way back when, it went to $100,000 for anywhere where you have your deposits – in other words, each depositor no matter how many accounts you’ve got.  Is that correct, or am I just not understanding that? 

JIM:  I think it’s in terms of property titling.  I’m not sure on that.  I know they tried to put a limit on that and don’t be surprised if that’s the case.  But that’s something, John, that we’ll probably have to check.  In other words, if you have 100,000 in your name, and you have 100,000 in the name of the trust that still might be covered but I’m not sure on that.  And if there’s anybody who’s listening to the program who has that fact, just send it to an email and we’ll be sure to get that on the program.  [31:04]

JOHN:  So basically this isn’t the bottom.  It’s probably going to get a lot worse in the financial sector, despite all of the predictions of things getting better.  Given the situation, I would assume that you’re buying financial stocks at this stage.  It’s not a good idea.

JIM:  No.  In fact, I wouldn't be buying for four basic reason.  First, the financial sector is going to experience greater losses ahead.  They’ve written off roughly about 468 billion dollars so far, and according to a very well-respected firm, Bridgewater Associates, there are probably about another one trillion in losses yet to be written off.  That’s assuming things don’t get much worse.  A second reason I think I wouldn’t be buying financial sector is as banks and brokers move to shore up their capital, what you’re going to see is major dilution probably in the neighborhood of 60 to 70 percent or more is going to take place.  A third reason is as banks and brokers have to go out and tap the capital markets, the cost of capital is rising rapidly for these financial institutions.  So shareholders are facing not only major dilution, which is going to mean lower rates of return.

And then finally there is going to be a significant – you know, what’s going to be the significant driver for the industry in the years to come?  Not only will balance sheets shrink, and shareholder returns drop but there’s also going to be a long period of building trust.  So even as cheap as things look today, they are going to get much cheaper over the next year.  Investors need to be very, very careful because a lot of people are saying, “well, you can buy banks because they’re selling at almost 1.3 times book value.”  But you know something, when it comes to banks, book value is a meaningless figure.  I mean book value is shrinking rapidly due to losses, and you really have no way of really knowing what book value is when asset values in a mortgage debt is falling as fast as it’s doing now; and especially with all of this off-balance sheet debt that a lot of these financial institutions are being forced to take back on the balance sheet.  Just take a look at the Fed, which has loaned half of its balance sheet to these financial institutions to keep these assets from dropping in value, which would technically make all of our top money center banks and brokers insolvent.  [33:24]

JOHN:  Well, the UPS truck is pulling up right now.  I’ve been ordering Maalox by the case, so I’m going to go out and pick up the delivery here.  While I’m doing that, why don’t you tell us what comes next. 

JIM:  The government and the Fed have in my opinion grossly underestimated the amount of damage – I mean they did that all along the way – they’ve also been late in responding.  So they’re going to come up with creative ways to reflate, and that’s what’s coming next.  Remember, a deflationary whiff usually precedes a major reflation, whether it’s going to be more helicopter drops which they’re talking about, new fiscal stimulus which they're talking about, more bailouts which they’re also talking about.  So the Fed will lend out most of its balance sheet and then they’ll begin to monetize.  In fact, John, in just a moment here I wonder if you can get that clip from the July testimony of Bernanke – I’m trying to think of the Republican Congressman who said, “You’ve loaned out half your balance sheet.  When the next crisis hits and you loan out the other half, what’s next?  Monetization?”

Bunning:  Can you assure us that you will not conduct any similar Bear Stearns transaction if another investment bank or GSE gets in trouble without the prior explicit authorization from Congress via some sort of enabling legislation?  Two, if you decide that there is no alternative than to conduct another bailout or support – however you want to call it – to one of these troubled organizations, will you be willing to monetize the debt to finance such a transaction due to the current limitations on your balance sheet?  And thirdly, on your claim that your actions with the Bear Stearns transactions are granted to you under Section 13 of the Federal Reserve Act, are there any limitations within that section or elsewhere as to your abilities subject going forward to deal with these situations?

Bernanke:  Well, to try to address those range of questions.  Over the weekend when we working on the Bear Stearns issue I was in touch with Congressional leaders – kept them informed – and the sense I got was that, you know, there was not an objection to pursuing it.  I also, of course, worked very closely with the Treasury and the SEC and other authorities to develop a consensus for the actions we took; and as I‘ve argued before, I think they were necessary.  So you know, I don’t want to make any commitments.  I don’t think a situation like this is at all likely, but unless I hear from Congress that I should not be responding a crisis situation I think it’s a longstanding role of the central bank to use its lender of last resort facilities to address…

Bunning:  So the first answer is yes.  So the second question then is would you potentially monetize the situation if the balance sheet…

Bernanke:  There is no monetization.  This is a sterilized operation.  There is no effect on the money supply.  And in addition, I would add that our lending not only to the Bear Stearns issue but more generally to our – to the banks and so on – is not only collateralized with good haircuts, it’s also recourse to the banks themselves.  We have not lost a penny on any of this lending.  And it is just lending.  We are not purchasing any of it.  It goes back to the bank when the term of the loan is over.  [36:37]

So if you take a look at what they’re going to do is I think the Fed will lend out the rest of its balance sheet, and then they’re going to begin to monetize.  As far as losses, we’re going to socialize much of this financial risk as we’ve recently seen here in the bailout of Bear Stearns and the 300 billion dollar housing rescue package; and we’re just getting started here.  So, those who have been responsible in this country are going to be forced to pay for those who have been irresponsible.  And I believe what they are going to do now is they’re preparing for the next wave of reflation, the concerted attack on precious metals is backfiring on them; we’ll get into that in the second hour.  And the more that they drive the price lower, the greater the buying frenzy in the physical market, just as in our conversation earlier with Jeff Christian where he talked about they’re actually almost limiting allocation of gold buying in Dubai.  We could see over the next 12 to 18 months, where you won’t be able to get your hands on precious metals.  I mean just listen to what Jeff Christian said in the last hour, what is occurring in Dubai, a major trading center for gold where they’re rationing gold.  Silver is getting harder to get; and I don’t want to get into that – I’ll save that for the Eric King segment in terms of what I’ve seen here in talking to dealers around the country over the last couple of weeks. 

But what does this say when our current Treasury chief – and here’s key – isn’t going to even serve out the remainder of his term.  Paulson has notified that he’s going to resign right after the November elections.  You know, it’s sort of like, John, you’re flying on an airplane and you look out the window to find that the pilot and co-pilot just parachuted out of the plane.  You know, when you think about it, Paulson is a Wall Street guy; what does it tell you that he’s parachuting out of Washington right after the election?  It tells you a lot about what lies directly ahead.  [38:35]

JOHN:  Probably the same reason that Alan Greenspan parachuted out when he did. 

JIM:  You’re absolutely right.  He got out of Dodge just before this thing began to – the housing market peaked, you could almost trace it to when he got out; I mean he saw this thing coming.  Now, he’ll say today that he didn’t see it coming and it’s very difficult to predict bubbles, but you know, obviously he got out just in time; and that’s what you’re seeing.  You’re seeing basically you know, your pilot and co-pilot are basically bailing out – and that should tell us a lot.  [39:10]

JOHN:  You know, if you look back to 2006, they were hammering resource stocks then; and that seems to be happening right now.  So is that some kind of a barometer to what might be coming next?

JIM:  Yeah, remember, they’ve got to set the stage when you start reflation  - remember, John, in 2003, and in 2004, everybody was talking deflation deflation deflation; you had the Fed, Greenspan had lowered interest rates down to one percent, the CPI had gone from 3% down to 1.5, and we later found out the reason that it did is they jury-rigged the CPI Index to start accounting for used car prices versus new car prices; and then also they messed around with rents and housing.  So that sort of set the stage for the next reflation.  The problem that the Fed has right now has been this tremendous increase in commodity prices and tremendous in the inflation rates.  I mean look at this week, the highest CPI numbers that we’ve seen in 17 years.  So they’ve got to set the stage, and they’ve got to the markets ready, and they’ve to going to get the markets clamoring for “oh, Ben Bernanke do something, save us.  Reinflate. There’s a risk here.”  And they’re trying to set that stage. 

The only thing is, John, is I don’t think it’s working as we’ll see.  Instead of inflation being a lagging economic indicator – as they have repeatedly told us over the last two years – the rate of inflation keeps going up.  And when you have very sophisticated investors – the largest bond fund manager in the world, PIMCO, talking about the return of inflation, when you have Bank Credit Analyst talking about moving away from an era of disinflation to inflation and another major wave of reflation coming to the globe, you’ve got to set the stage for that; and that’s why you get all this mumbo jumbo about the commodity bubble has burst, deflation is here, goldilocks economy, strong dollar – all this is basically propaganda that if you try to look through the facts just doesn’t hold up.  So, they’re preparing us in a way psychologically for the next reflation. 

And I think it would be really interesting here, given the fact that this crisis we’ve seen the Fed take on unusual steps from bailing out an investment banking firm, from swapping debt off its balance sheet, from the TAF facility, from loaning money to the investment banking commodity – and I think it would be very instructive to read Bernanke’s papers and some of the papers that came out around the year 2000, 2001, talking about what would happen if interest rates got down to zero; and one of the things the Fed talked about is taking not only unusual measures of which we’ve seen, but they also talked about buying and monetizing assets.  Don’t be surprised if that’s what they’ve done in effect with taking on these toxic mortgages onto their balance sheet.  This is a first step.  So you haven’t seen anything yet.  You’re going to see something you’ve never seen before, and I think it would be very instructive to go back and read those Fed papers back from 1999 to the year 2001 because a lot of what you’ve seen happen here since last August was written in those papers.  [42:41]

JOHN:  And you’re listening to the Financial Sense Newshour at www.financialsense.com.

 Midyear Outlook: What's Behind Higher Oil Prices

JOHN:  It became real clear to most of the world this week that a lot of the fight in Georgia was not really over ethnic cleansing, it was over oil pipelines and over, I guess, two rules of the new great game that Lutz Kleveman was talking about.  Rule number one is:  Get as much oil energy as you possibly can.  Rule number two is:  Keep your opponents from getting as much as they possibly can.  And that would seem to factor in here. 

There were two reports which became available this week which actually corroborate each other.  The first one was a report on oil by the Interagency Task Force on Commodity Markets, and the other one was the Medium Term Oil Market Report by the IEA – the International Energy Agency.  The ITF was tasked by the government to look into the spike in the oil markets.  You know, you have senators who think speculators are the cause behind the spike in oil prices.  So the ITF –made up of the CFTC, the Dept of Agriculture, Energy, Treasury, the Fed, the Federal Trade Commission and the SEC – were tasked to look into the matter. So let’s get right into it.  What did they find here, Jim, because I think these reports were important? 

JIM:  I’m going to try to summarize it here, but it wasn’t speculation; two simple factors, supply and demand.  World economic growth expanded at its fastest clip in decades, and of course that strong economic growth has translated into a substantial increase in the demand for energy, and especially coming from the emerging markets like China, India, OPEC, Latin America. 

Now, on the other side of the equation – the supply side – production has not kept pace with demand despite major increases in investment. What makes this decade different is that world spare capacity has diminished and has fallen below historical norms.  I mean if we go back let’s say, a little over a decade ago in the early 90s, OPEC’s spare capacity was over 10 million barrels a day, so anytime there was a crisis as we have had over the last couple of years – whether it’s hurricanes like Katrina and Rita, supply disruptions due to terrorism (for example, taking out oil platforms in Nigeria), or supply disruptions due to a shutdown of a refinery or a refinery fire, what we have had to do is drawdown on our existing stock. 

So if you take a look at some of the reports that came out and especially the midterm oil market report from the IEA this week, what has happened is we have had to draw down stock.  Stock is now below levels between what has been averaged between the years 1996 and 2002.  So according to the ITF, the balance between scarce supply on one hand, and growing demand and future expectations that this imbalance is going to persist, has led to this upward pressure on oil prices and greater market reaction.  So as the ITF contends, if speculation, for example, was the driving force or the factor behind higher prices, then what would accompany that speculation? In other words, if there really wasn’t the demand but it was just speculators trying to drive the price, you would expect that inventory levels would be rising; and that’s what you usually have when a bubble bursts.  If you look at the tech bubble, when there was an overabundance of broadband and tech products, even though the prices were going up towards the end of 1999 and the first quarter of 2000, inventories were building despite the run-up in prices.  You have not seen that.  If you take a look at – and we’ll get into this just a little bit later – but in fact, our energy inventories have been drawn down, just as for example, our government reported that our inventories fell this week.  So we haven’t seen that. 

And furthermore, if you take a look at these commodity swap dealers which hold balanced positions between long and short positions in the energy market, if you take a look at where they were in the first six months of this year when prices were spiking, they were actually net short.  So if anything, if they were speculators, they would have benefited more from price decreases rather than a price increase.  [47:50]

JOHN:  So it’s a pretty simple equation here.  What the ITF is saying is that demand grew, supplies failed to keep pace with demand, and that most of the world’s spare capacity disappeared in the interim. 

JIM:  That pretty much is it in a nutshell.  In fact, the International Energy Agency midterm report says pretty much the same thing.  I mean global demand is still expected to rise by 1.6% per year, driven primarily by China, India, OPEC and Latin America.  Now, demand – where you do hear about demand destruction and it’s very small in comparison, that is in the OECD countries; and that is dropping slightly around 0.1% on average while demand in the rest of the world is growing at 3.7%.  So even worse – and here is something that I think is going to be very alarming – and this goes back to our interview last week with Matt Simmons – the IEA is doing the same thing Matt Simmons did which is studying the largest 250 oil fields in the world and they’re going to issue that report in November; and when that comes out hopefully I can have Matt back on the show, and I’m going to be talking to quite a few experts in the field when I go off to ASPO this year.  But even worse in the IEA report is they have increased world depletion rates from 4% to roughly 5.2%.  Now, that means that the world is going to have to find and produce 3 ½ million barrels a day of new oil just to stay even from what it is that we’re losing due to declines in our existing oil fields.  On top of that, we’re going to have to find and produce another 1 ½ million barrels of new oil to fund growth in the developing world.  Now, translation – what that means, John, we have to be finding a new Saudi Arabia every two years, and I can tell you right now that simply is not going to happen.  Moreover, most of all of this demand in both the OECD and non-OECD countries is concentrated primarily in the transportation sector.  So what is alarming is that distillates such as jet fuel, kerosene, diesel, gas oil, followed by naphtha and LPG (which is used for petrochemical feedstocks) and gasoline – this is where the demand is.  You start trading in a bicycle for a motor scooter for a car, now you have a permanent consumer.  [50:18]

JOHN:  It sounds like -  I don’t know if it’s so much Houston as, Dallas, we have a problem.

JIM:  Well, John, it’s really a bigger problem and that’s why Matt Simmons and others are saying – in fact, we did three interviews ahead of our recess and in fact, we’re speaking on Friday – on Thursday of this week we interviewed W. Lyle Jr. and Scott Allen both of them are PhDs, one of them is a professor at SMU – both of them have PhDs in engineering from Purdue, and they are retired scientists from the exploration and producing technical center of large international oil companies.  In fact, both of them have been awarded over 40 patents and authored over 50 technical papers.  They’ve been featured in things like Science, Geophysics, Nuclear Science and Engineering, and the Journal of Petroleum Technology,and we’re going to play that interview the last month.  But John, what they’re saying here is we’ve got a major problem, and the reason they wrote the book is these are guys who deal in very technical, mathematical equations, physics and things like that, and they wanted to put in simple form, in layman’s English, how serious of a problem that we’re facing here.  And it was amazing.  I’m just quoting here from the book: 

If global warming and peak oil production are both occurring, which of the two poses the most immediate threat?  A question the media should be asking.  The world is facing an unprecedented crisis the likes of which we have never had to experience.

And so you’re right.  Houston, we do have a problem.  It’s a big problem and unfortunately our politicians are still arguing whether we should lower the lifeboats.  The only good thing that has happened and that’s thanks to higher oil prices, the market is forcing conservation in the develop[ed] countries.  People are driving less, they’re trading in the gas guzzler for more fuel efficient cars.  You can see this in new auto sales; the sales of SUV and trucks are down.  And that’s why the IEA sees falling at roughly 0.1% a year in developed countries.  However, and here’s the bigger picture:  In the faster growing areas of the world, such as China, parts of Latin America, and with OPEC, in these developing economies they’re not being subject to market forces.  In other words, they’re not seeing higher prices.  That’s because these countries, like China and OPEC, subsidize the price of energy, so citizens aren’t really being exposed to the real cost of energy like we are in the West.  That’s why those areas remain the fastest areas of demand growth around the globe, and are in countries where fuel prices are subsidized and demand isn’t subject to the price signals given by the market place.  [53:35]

JOHN:  What really strikes you when we talk about all of the information here –and you’re right, we’ve already heard the interview with Lyle and Allen, which our listeners won’t hear for a couple of weeks here – but you pile all of these facts up and you really do come to the end going, “oh my gosh, we’re in trouble;”  but the public dialogue that you’ve talked about out there has not caught up with where we are right now.  They’re like six to 12 months back on all of this.

JIM:  It’s amazing because in my opinion the markets are broken because they aren’t being allowed to function properly. In the developed countries, you’re seeing higher prices are forcing conservation, but the politicians and especially here in the US are still stuck on stupid.  I mean they keep looking for a scapegoat instead of solutions.  In the developing world, the price of energy is being subsidized so demand keeps growing rapidly.  So you have a collision course between the forces of demand and the forces of supply.  In other words, we’re heading full steam right into the crisis that both Lyle and Allen talked about when we interviewed them earlier in the week and what Matt talked about last week.  Right now, it appears that prices are heading lower because of demand destruction, but John, that is a very wrongful perception.  Whether you read the Interagency Task Force on Commodity Markets or you read the Medium Oil Market Report by the IEA that came out this week, demand is still growing – and you can see that not only in terms of what’s going on in Latin America and OPEC – and the problem is demand is still growing, depletion rates are also growing as old fields go into decline, inventories are dropping. 

Also, surplus capacity has greatly diminished and that is why without significant surplus capacity the markets can no longer rely on increases of production from key members of OPEC to offset supply disruptions or restore balance without the need for a significant price increase.  This is unlike what we saw in the 90s.  Any time there was a crisis whether it was the first Gulf War or we had some kind of disruption there was so much excess capacity within OPEC and demand was so much smaller than it is today, that there was a big spare cushion that we could rely on.  All you would have to do is have some OPEC official like in the first Gulf War, Saudi Arabia came up to the plate and said we’re going to start pumping out extra oil and the oil prices quickly subsided.  We’ve had these surges and big spikes, and we’ll get to one of the reasons why you’re seeing that in the oil markets today, which were some of the conclusions from ITC.  [56:11]

JOHN:  You know, if you take a snapshot of this situation right now, depletion rates are going up, every single year the demand is up.  The supply is not keeping up and of all of the countries that are out there that could produce more oil, there are only three of them in the entire world.  That’s it. 

JIM:  In fact, the IEA talked about:  Who is going to be able to produce the extra oil that we need?  Saudi Arabia, Nigeria and Iraq? – All right, so let’s assume that Saudi Arabia is going to be able to increase its production.  Well, one of the things they talked about – what Saudi Arabia is doing is they’re building four new major cities that are going to house refineries, petrochemical complexes, one of the world’s largest aluminum smelters and essentially Saudi Arabia Aramco is becoming an integrated oil company.  They’re saying, “you know, why should we just pump the stuff out of the ground.  What we’re going to do is we’re going to take this stuff that we produce and we’re going to turn it into higher end products, such as diesel, kerosene, jet fuel, gasoline and make even more money on the products that we have.” 

And another thing they’ve also said is – and this was a key – is that we are not going to maximize our production because we need to save this valuable resource for the future.  And so you only have three or four areas.  The other thing the IEA talked about is you have a lot of project delays that are occurring around the globe because where we’re finding oil in the deep outer shelf off let’s say, in the Gulf of Mexico or off the shores of Brazil, South China Sea, we’re finding oil at depths that are so deep we don’t even have the technology yet available to extract it.  And they’re talking about not only delays of anywhere from 12 months to two years on existing projects due to shortage of labor, shortage of parts, costs that have doubled -  and a lot of these major projects that are supposed to come on keep getting delayed and delayed.  I don’t care if you’re looking at Kashagan which is in the Caspian, if you’re looking at Thunder Horse and some of the other projects in the Gulf of Mexico that are supposed to be coming on, and now they are coming on later on towards the end of the year, but it has been one delay after another.  So one of the problems that you have – and there’s always a tendency whether it’s the Jack discovery a couple of years ago in the Gulf of Mexico with Devon and Chevron, or it’s the Tupi field off the coast of Brazil by Petrobras and there’s this immediate extrapolation, and especially in the Jack field where they put one drill in and they said, “well, we can find the same results over the next couple of miles or so, then you know, we have x amount of oil.” 

And the problem is that a lot of this stuff is not going to be coming onstream at a time that we’re going to need this.  Even though some of this stuff will come onstream let’s say next year, you’ve got to remember, one of the most damaging things that the IEA said is we were originally estimating that depletion rates were around 4%, now we have found with a closer examination – and I think with the reason that they came up with this higher figure –and this is going to relate to a report that’s going to be published in the fall probably in November – they are looking at the world’s largest 250 oil fields, which are close to 50% of the world’s oil production – and as they look at these fields and get more precise data on the decline rates that’s why they upped their depletion rates rather dramatically.  I mean think of it this way:  We have to find 3 ½ million barrels a day of new oil, and if you look at some of the supply that is coming online right now, the difference between conventional oil production it’s coming from non-conventional sources (NGLs, coal-to-liquids, natural gas-to-liquid, biofuels, tar sands and shale.)  (Shale oil is much, much different; and tar sand oil is more of a mining operation than pumping oil with a Jack rig and it’s much more extensive, it consumes more energy.)  

That’s one of the things that is so alarming here is, unfortunately, instead of taking steps right now, even though public opinion is saying do something about this, start up domestic drilling, our politicians are still playing the blame game and looking for a scapegoat.  And that’s one of the problems that we’re going to have.  Our largest suppliers of energy – if you take a look at Venezuela, they have cut back their shipments of oil to the United States.  If you look at Mexico, they’ve cut back their shipments of oil to the United States; if you look at some of the other members – I mean where are we going to get this oil when our production continues to decline and once again, we’re still consuming massive amounts of energy, mainly in the transportation system because you know, John, you can’t flip a switch and say that, okay, we’re going to change the car fleet overnight.  We’re probably looking at another decade away before we can make a measurable change in the type of vehicles that people drive in this country.  [1:01:39]

JOHN:  A lot of things we hear from emails from people who listen:  what explains for example, price spikes; or someone asked me, why is oil taking a nose dive now?  People don’t understand why we have the dipsy-doodles despite the fundamentals of supply and demand still being in place.

JIM:  Part of it is once again, going back to that spare capacity cushion that we used to have, and a lot of it is as the IEA reported and the IFC reported is that these bottlenecks are occurring from capacity constraints in the refining sector.  Refiners have different refinery runs given the time of the year.  Like, right now, for example, in March to May, refineries will start increasing the supply of gasoline for the summer driving season.  Then you start heading into fall and they’ll change their product mix to let’s say heating oil or distillates or something else, depending on what the seasonal demands are.  So when you have a problem as you did this January where you had the coldest winter on record in China where you had tremendous demand for heating oil and using it  - remember, a lot of these emerging countries use a lot more oil products for generating electricity than we do here in the West.  Then you have situations in China where the price of energy is subsidized by the state, so you have a lot of what are called ‘teapot’ refiners – they’re small refiners maybe producing maybe 10 or 15,000 barrels of oil a day – they couldn’t buy oil in the open market at over $100 a barrel and sell it at subsidized prices.  so as their production fell down, what happened is China had to go into the open market and buy diesel to make up for their own lack of demand from their own production shortfalls.  In addition to that, we had the earthquakes that took place in China and also shut down power, so we had China also having to go into the market.  So when you’re running a refinery and you begin a run, when you set the refinery up –whether you’re going to produce heating oil or gasoline – you can’t flip a switch overnight, and say all right, instead of producing diesel we’re going to produce gasoline; or, instead of naphtha, we’re going to produce heating oil.  So what happens is then there becomes this bottleneck, the refiners have to sell whatever it is they’re producing in their regular season; get rid of that and unload that, and then they bring in new stock and try to produce whatever is in short supply.  And when this occurs you have these large price spikes that you see in the market, and that is what the conclusion was:  We had bottlenecks in refineries and refinery capacity – and that’s one of the things you’re seeing right now, India is building refineries, Saudi Arabia is building refineries – they’re saying look, if you idiots aren’t going to build them and make the money, we might as well build them and make the extra money on it. 

So, once again, what I find amazing, both of these reports were issued roughly within a couple of days of each other and we’ll try to get the Interagency Task Force on Commodity Markets, the Interim Report on Crude Oil – we’ll try to get that link on our website so you can read it yourself.  However, the Medium Term Oil Market Outlook by the International Energy Agency that is a paid for report.  But if you have the money, it’s definitely worth while reading because the two reports definitely corroborate each other and lend credence to what I think is what so many of our guests have talked on on the program is this perfect storm that we’re heading into as it applies to energy.  Growing demand and lack of supply, and inaction.  And what you have here is one of the grossest distortions that you’ve seen in the market place for any commodity probably in the history of the world.  On the demand side, you have a gross distortion in the energy markets because governments that have the fastest consumption growth rates such as China, India, OPEC countries and certain Latin American countries are subsidizing the price of energy so their citizens have no concept of the real cost of energy.  So you have a distortion that’s taking people on the demand side.  In western countries and especially the United States, you have a distortion that’s taking place on the supply side as government at every step is trying to stop the production of energy – whether it’s trying to put up solar arrays in the Mojave desert to protect a squirrel, whether it’s trying to put up wind farms offshore where the wind blows, whether it’s trying to build a nuclear power plant, a refinery or drilling for the price of energy.  So you have distortions created by government both on the supply side and the demand side.  [1:06:54]

JOHN:  Something’s been bothering me as you’ve been talking here because I’m trying to put this together into a “what does this mean?” type of picture.  We talked in the first segment of the Big Picture that it’s getting ready to hit the air conditioner out there as far as the financial sector; at the same time, the energy picture is far worse than anyone seems to be comprehending –save for a few individuals – and you could be left sitting there trembling, “what is that going to mean?”  What is this picture looking like, and what kind of a path are we headed down because somewhere or another it has to break?  It either gets far worse and people wake up; or it doesn’t – people wake up earlier and we try to do something, but where will that happen? 

JIM: Unfortunately, no matter what government tries to do by forestalling dealing with the issue, it’s going to lead us into a crisis and it’s only when we get into that crisis that the public and the voters will force politicians – I mean, John, we’ve talked about it here – look at the reversal in positions of our two leading contenders of the presidency, both Barack Obama and John McCain – major reversals.  And you know, unfortunately this is stuff you can’t flip a switch.  Even if they were to lift the ban on offshore drilling, oil companies have to get the drills, they have to get the personnel, they have to get the supplies, then they have to do seismic mapping, geological studies – so you’re talking about something that is off into the distance.

That’s why one of the things that we’ve been talking earlier on this program – we interviewed one of the gentlemen that was on the design time that invented the Prius – I have finally come to the conclusion that I am going to get a hybrid car.  I was originally looking at getting a diesel but because of the shortage of refinery capacity of diesel here in this country and also globally, and especially with what’s going on in China, that I believe as shortages develop in the price of diesel that the transportation system – in other words, boats, planes, trains, trucks – are going to be given priority for diesel fuel.  People who own motor yachts or wave runners are going to be out of luck because you’re going to have get goods to the store.  So I’m looking at a hybrid and I’m looking right now at the new – I think it’s going to be the 2009 model.  I’ve been talking to officials, the Prius, where they’re going to have solar panels – part of the car is going to be – I think the air-conditioning system, the solar system will draw enough power to power the car.  But it’s not that I can’t afford to buy gasoline.  The reason I want a Prius is because when they get to rationing and they say, look, you only get 10, 20 gallons of gasoline a week, you’re going to want some kind of vehicle that’s going to get 45, 50 – it’s my understanding that not only will the new Prius have a bigger engine, it’ll be faster but its gas mileage will be better.   We might be able to get over 500 miles on a tank of gas.  And that’s what you’re going to want, and so if you thought about maybe – you know, most people with the car boom right after 9/11 up until roughly a little over a year ago, a lot of people bought their cars on leases and if you’re in a lease situation, hopefully when that lease comes due you can trade it in and get yourself a fuel efficient car.   But every family should have one fuel efficient car that you’ll be able to rely on when they go to rationing because you simply cannot have this kind of demand growth and these kind of supply constraints and geological limitations and political limitations without something giving here.  And given the fact that both governments on the demand side and the supply side are distorting the market place by either subsidizing or preventing action to increase supply, something’s got to give here and it’s going to be higher prices and eventually shortages.  It’s very much like what we’ve seen in areas after Katrina and Rita when they knocked out the pipelines and the refineries along the southeastern coast of the United States, and the lines just built up around gasoline stations because supply was lacking.  So those are the kinds of steps that they should take.  [1:11:19]

JOHN:  Okay.  Let’s talk about the credit crisis and the insolvency that you were talking about earlier; what actions do people need to take here?

JIM:  First of all, don’t have more than $100,000 in a financial institution – a bank, S&L – that’s number one;  2) if you do have large amounts at least spread it.  If you want to keep it in the banks, spread it around different banks.  You might want to consider just going into Treasury bills if you have large amounts of cash so that you don’t have to worry about a bank going under and losing part of your deposit.  Be very careful on money market funds – especially the problem a lot of these money market funds were investing in auction rate securities which just fell precipitously here during that crisis window that we saw from Bear Stearns all the way up to the present.  And we’ve got another crisis window coming up.  A lot of these money market funds may have a 10 million dollar CD, so make sure if you are in a money market fund you’re in a Treasury.  It’s something that we have always done at our firm.  We’ve always had our money market in a Treasury money market fund that is strictly Treasuries.  So those are steps you can take.  And beware of institutions that are offering abnormally high interest rates to entice such as like the way IndyMac was, and what some other of these troubled institutions are doing.  [1:12:45]

JOHN:  Well, you know, this week the price of metals is rather radically down.  I think I know the answer to this, but what should we be doing right now in that area?

JIM:  Right now there are shortages of silver – and I don’t want to get too much into this, John, because we’re going to cover this in the next hour with Eric King, but I’ve been checking with the five largest dealers almost on a daily basis over the last two weeks.  I mean on this Friday I just bought a ton of silver and I’ve been told it’s going to take two months to take delivery on that ton.  And if the price goes lower, I’ll buy another ton.  But what is going to happen is right now, for example, September, the US Mint has suspended the production of US Eagles.  I was told by one dealer this morning, checking with him, they’re telling people delivery dates for silver Eagles won’t be till January, February of next year.  And this individual that I was talking to this morning, I had to use a couple of dealers in order to make my purchase because I bought over 35,000 ounces of silver, and what happened is one dealer said that we can’t even get the plates – so what they were doing is they were ordering thousand ounce bars and they were melting the bars down to make one ounce coins because most people are buying either silver rounds – and I was told delivery dates right now are two months out.  So this is August, probably late October.  That’s how scarce it is.  We interviewed Jeff Christian.  If you listen to him, they’re rationing allocating gold in Dubai.  So, the other thing is get your physical metals because there is a gross discrepancy and divergence between trying to drive down the paper market price of silver.  One dealer told me in July his sales were up four fold last year; and this month alone, his sales are up eight fold.  In fact, when I called – this guy knows me very well and when I asked for him, the secretary that answered said, “I’m sorry he’s not available for the rest of the day.”  And I said, “well, please give my name to him and tell him to give me a call when he has a chance, even this weekend.”  And she got back and they said, “hold on, he’ll be right to you.”  And I had to wait five minutes but he got back to me, and he said they have just been swamped – literally swamped – and so this effort to take down the commodity sector, instead of panicking – they’re not selling, number one – and number two, it’s generating probably the largest buying.  One dealer was telling me today that he had never seen anything like this in his lifetime.  [1:15:27]

JOHN:  By the way, Jim, you were talking about getting a ton of silver, is that being delivered to your front door?  What do you do, bury it in the swimming pool or something, or what?

JIM:  No.  I’ve got a couple of dealers who store my bullion for me until it’s shipped overseas. 

JOHN:  So sneaking it into your backyard at night isn’t going to yield any results?

JIM:  No, I don’t think so.

JOHN:  All right.  You’re listening to the Financial Sense Newshour at www.financialsense.com.  More to come.

 Part 2

 The Great Game

What we’re doing now is sort of extrapolating the instability because the Caspian region, make no mistake about it, is going to be the next big battleground.  It’s going to be a big gas station, but it’s also going to be another battleground.  It is not going to be any better than the Middle East.  You’re looking at countries – the post-Soviet countries for example – that are largely ruled by former KGB, by former top communists.  Now, this luckily has changed in Georgia recently – but these are quite awful dictatorships that you’re dealing with.  Now, dictatorships, quite naturally, lead to internal unrest, to political instability; and then you have oil coming into the equation and oil raises the stakes in any political struggle.  Now, this is actually why oil has been called the ‘devil’s tears’ in the region for most people down there, and I’ve spent the past two years traveling there, and time and again I would realize for most people down there – most ordinary people – the oil boom is more of a curse than a blessing.  And what we’ve been trying to do is to deploy thousands of troops in the region in the cause of the War on Terror, obviously, but also to protect these strategic oil reserves, but this only adds to the potential instability in the region.

JOHN:  That was the very familiar voice of Lutz Kleveman from an interview, Jim, that you did back on January 24th of 2004.  It was about his book The New Great Game:  Blood and Oil in Central Asia.  He says in the book that crude oil, once seen as a wealth creating blessing for mankind, it’s fast turning into the devil’s tears for many, many people as we see what’s going on in Central Asia right now in the Caucasus as a matter of fact.  The concept of the Great Game – it’s a British term for what the British saw as a strategic rivalry and conflict between their empire and the Russian empire to achieve supremacy in Central Asia in the 19th Century.  The classic Great Game runs approximately from the time of the Russo-Persian treaty of 1813, to the Anglo-Russian convention of 1907; so that’s what we mean by the Great Game.  The concept was promoted by Rudyard Kipling in his novel Kim, which has been widely read ever since he wrote it, but the new Great Game is basically occurring in the same area of the world.  It’s what Richard Mayberry calls Chaos-stan because there are so many –stans there, and the difference now is rather than dominance simply for empire’s sake, the dominance here is for oil’s sake.  [2:50]

JIM:  That was the thing I found most fascinating.  And it was amazing the timing of the invasion was done the weekend the Olympics started.  Nobody was paying attention – the President was over watching a basketball game – and here we had this big invasion.  And what was key here was there is a pipeline that runs from Baku through Georgia all the way to the southeastern port in Turkey at the BTC pipeline, and this carries – this was a great western push – it began with the Clinton administration in the 90s to build a pipeline that would be free of Russian control – and this began during a period of what they call the Orange Revolution based on the different takeovers of the –stan countries that border the Caspian sea.  And I wrote a piece last year and I called it Eyes Wide Shut –it’s posted on our website and if you go that website and click on to the Eyes Wide Shut – there’s a map taken from Lutz Kleveman’s website that he gave me permission to post and it’s called The New Great Game, and you can see the pipeline routes that go through this area; through Saudi Arabia, Iran and around the Caspian, all the way to the Mediterranean and what this will do now – as Stratfor and many others have talked about – is the oil begins in Baku where the pipeline begins and then it goes through Tbilisi, the capital of Georgia.  Now the Russians have control over Georgia and over the pipeline. 

So once again, there was an article in the Wall Street Journal this week, an article by Melik Kaylan, called Welcome Back to the Great Game, and he talked about Moscow’s thin pretense of protecting an ethnic group provided just enough cover for Georgia’s timorous friends in the West to ignore increasing Russian provocations.  And he goes on:  What’s going on now is Moscow is casting a shadow all across Central Asia and down into the Middle East; and he says, “We in the West are being challenged by Russian actions in Georgia to show that we have the nerve and the stamina to secure the gains – not just in the wars, but the entire collapse of the Soviet empire.”  And he goes to talk about – this is something Lutz wrote in  his book The New Great Game, which came out towards the end of 2003; we interviewed him – I think, John, that was our first interview of the year 2004.  But that pipeline runs through Azerbaijan, two countries that are immensely important to this pipeline which delivers precious oil circuitously from Azerbaijan to Turkey and out to the rest of the world; and the actual oil that’s being delivered through this pipeline has been free of interference from Russia and Iran and also the Middle East. 

Now, in this latest assault and invasion, Russia has now asserted control, so basically they control this transit of oil. In fact, Russian jets bombed part of the pipeline.  I think this pipeline carries about 850,000 barrels a day and eventually it’ll carry a million barrels a day.  Let’s go to that clip where he talks about the US’s increasing dependence on oil and why, as a result of not only the oil embargoes of the 70s –and especially the instability that we’re seeing in the Middle East now with Hezbollah and other countries in the regions – that we were trying to find another sustainable secure source that would be free of Russian and Iranian and Middle Eastern control; and now that has been thwarted – almost more than a decade long diplomatic front and now the Russians are in control.  In other words, they can shut that pipeline down at any time that they want, just as they were able to shut off natural gas to Europe. 

Well, the situation is much, much worse even today.  I’m not an expert in Roman history, but what we’re looking at today is a veritable addiction.  And it’s not the kind of addiction like nicotine addiction, where if there weren’t any cigarettes around you could go for a couple of days, a couple of weeks, and perhaps further without smoking again, you know, the skin might itch a little bit but you’d be fine.  Now, in this country, if there were no oil imports – if the flow of oil were stopped – this country would grind to a halt within a couple of weeks.  We do have that strategic oil reserve in Louisiana but that’s not enough at all.  And so what we’re looking at is a political dependence also on countries that don’t particularly like us.  That is the crux.  That is the main problem here that most oil reserves are controlled by Muslim countries, by countries where the United States is not particularly popular.  So, by going in there and trying to secure the oil reserves and trying to secure access to them, the United States is only likely to make people more angry, so there’s a vicious circle here.  This is what we’re seeing in Iraq, but also what I’ve seen in the Caspian sea – in the Caspian region.  [8:26]

JOHN:  This week on C-Span, Jim, they had an interesting panel discussion that was put on to deal with this whole situation.  Frankly, to be honest with you, I found more information on C-Span – you know, Congress is not in session so they are actually running some good things.  All right!  And there was more information contained on some of these panel discussions on C-Span than you were getting from any of the talkies.  It was amazing the difference in information that was coming out.  There was a lack of it on CNN and Fox and these people, whereas there was substance on the C-Span side.  And Ralph Peters was on and he has a book out called – he’s a former Lt. Colonel, by the way – Wars of Blood and Oil:  Conflicts in the 21st Century and he was talking about the role of Vladimir Putin, who’s theoretically no longer president, you know, Medvedev is supposed to be president right now, but it was very clear the timing of this attack was strategically timed.  I mean, NATO is out on vacation and the Olympics are under way.  I mean who’d believe that somebody would do something at this time.  It really had, as he said, Putin’s fingerprints all over it.  Here’s a clip from that C-Span panel discussion. 

And we should make no mistake Vladimir Putin is one such genius as he brilliantly planned and executed the operation illustrates he is the most effective leader in the world today – of certainly of any major country.  No one else comes close.  Obviously, the ruthlessness helps.  He is just uninterested in international law, precedent, et cetera – and for now, for Russia, he is great.  In the long run he may be a very negative factor for Russia, but for now he’s riding very, very high.  Putin is a former KGB man, and he must have been a brilliantly good one because his assessment – and of course, that of his staff – of how the West would react, of how the western media would react, and how president Saakashvili would have to react was brilliant.  I mean, Saakashvili isn’t the right guy at the right place at the right time.  Anyone who’s served in the military and risen above the rank of private can tell you that – I keep wanting to say the Soviets, yeah, but you know, the Soviets had more restraint.  The Soviets actually cared more about world opinion than Putin does, but the Russian military, even though Putin has poured oil and gas revenues into it, is still a relatively lame organization, and they’re strategically brilliant in this, operationally, tactically they’re very weak – but certainly – and they overpowered the Georgians.  [10:58]

JIM:  What is really key here and you know, you’re referring to this Great Game – Lutz Kleveman has referred to the Great Game and a couple of astute commentators in the Wall Street Journal and including also Stratfor referring to the same thing – but you know, the one thing that we were trying to secure as sources of supply –whether we’re looking at Venezuela, whether we’re looking at Nigeria where rebels are taking out oil platforms, the world’s oil is now in the hands – as Lutz said – in very unstable regimes in the rest of the world, and the US is more dependent today than we were, let’s say, 30 years ago during the oil embargo because now we have to import 70% of our both energy and refined energy needs.  Not just oil and natural gas, we have to import our gasoline because we don’t have enough refinery capacity, we import our jet fuel, we import diesel fuel into this country.  And so what we were looking for was a source of oil that would be free of control by both Russia and Iran. 

And if you take a look at that whole region outside of not just the Middle East, but the Caspian region you’ve got the natural resources of Central Asia from Turkmenistan’s natural gas to Kazakhstan; remember, the Kashagan oil field – one of the biggest oil discoveries that we’ve probably made in two decades, that’s where that new oil field is located.  But Kazakhstan’s abundant oil now cannot reach the West free of Russian and Iran except through that narrow conduit in the Caucasus.  Now what we have is it won’t be long – as several commentators have made this week – where Moscow will dictate exactly how that oil flows.  And essentially, what they’ve done is set up another choke point or a bottleneck in the Caucasus which gives Iran and Russia much say over what is going on – not only in Afghanistan, but also in the Middle East, but now the Caspian.  It’s absolutely fascinating. 

Let’s go, John, to that clip where Lutz Kleveman was talking about the importance of Georgia.  [13:20]

Georgia is a linchpin country for the export of oil and gas in the region.  It’s in the southern Caucasus between Turkey and Azerbaijan, just south of Chechnya.  Very much in the strategic back yard of the Russians, who still feel very sad about having lost Georgia in particular.  There’s a sort of romantic attachment to the Caucasus in Russia as well.  Now, this is where this big pipeline from Baku to Ceyhan is going to run through.  Now, the problem with Georgia though is that it is once again a very volatile country.  It’s basically a failed nation.  You’re looking at various provinces I’ve traveled to, Abkhazia, Azaria, South Ossetia, where civil wars may have occurred in the past couple of years, that have split away from mainland Georgia.  There is quite a bit of anarchy, quite a bit of chaos.  There are lots of people carrying guns in these in these regions and that is what makes Georgia another very important battlefield in the New Great Game.  The Russians still have thousands of troops in Georgia, you mustn’t forget that.  They’re very unlikely to withdraw their troops.  You know, this is what the Russians have been trying for years and years.  They’re trying to undermine the American pipeline plans in Georgia by stirring up the trouble, by fueling these ethnic conflicts in the southern Caucasus – not just in Georgia, but also Armenia and Azerbaijan over this Karabakh place, and there – this pipeline will never see the light of day. 

Now, the Americans, obviously, want to protect this pipeline.  The Bush administration sends some 500 troops in there a year and a half ago, after September 11th, and these troops are there to stay.  They are part of thousands of other troops deployed in Uzbekistan, in Kyrgyzstan and possibly very soon in Azerbaijan.  And these are troops that are nominally engaged in the war against Al-Qaeda and the Taliban, but make no mistake about it, they are there to stay.  The Russians want them to leave but there isn’t much the Russians can do.  But quite interestingly, the Russians have now opened their own military base in Kyrgyzstan, very close to the American base.  So there is this specter of interstate conflict is rising.  I remember in Georgia, it was the most corrupt place I have ever been to.  It’s a typical case where oil comes into play it only worsens corruption, it only worsens bad governance.  Luckily, Eduard Shevardnadze was overthrown.  He wasn’t the worst guy in the region, but he was one of the strongmen, and one would hope Mikheil Saakashvili, his successor, to bring more stability, less corruption and more democracy to Georgia.  But it’s not going to stop the geopolitical tug-of-war that’s going on between the Russians and Americans over Georgia.  [16:18]

JIM:  You know, it’s absolutely amazing, if you go to that map that we have taken and gotten permission from Lutz, and it’s featured in my article on the website, Eyes Wide Shut, it’s called the New Great Game Territory, and if you press the button on the interactive division there are a number of things that you can add to the map:  the name of the countries, the name of the bodies of water; but also the oil and gas reserves, the existing oil pipelines and gas pipelines, the planned oil pipelines and gas pipelines, US and military bases. 

It’s absolutely amazing because what you have here now – and you’re going to see this not with just what’s going on in Georgia, but you’re going to see it with the rest of the other –stans in the region – the former soviet states of Turkmenistan, Uzbekistan Kazakhstan, Azerbaijan, and Georgia – and you’re going to see Russia reassert control over that whole area, whether you’re looking at Tajikistan, Afghanistan or Kyrgyzstan.  And you look at this and you can just see where all this oil and natural gas from the Persian Gulf and from the Caspian, the two largest epicenters of sources of oil in the world, you have roughly about 70% of the world’s oil reserves are in the Persian Gulf and the Caspian sea; and you can see from these pipelines and these gas lines, where they go and the military bases all along them, how we are now going to begin a second stage or a second front war, in addition to not only the conflicts that you’re seeing erupt in Lebanon, also going on between Israel and the Palestinians, also conflicts between other states in the region.  This is what Lutz talks about is a series of proxy wars.  And there are a number of people – very astute people – who have written about this years ago – Michael Klare in his book Resource Wars, then Blood and Oil, his most recent book – so there are a number of things that are taking place, so let’s play one more clip I think here; this is the one where I think Lutz – it’s the one where he’s talking about the series of new proxy wars of which we’ve just seen in the last week is one of them.  [18:53]

Well, I’m not one to claim that World War III is going to break out any time soon in Central Asia.  I do think what we’re going to see in the future is more proxy wars, more low-level conflicts as they’re called.  They’re called low-level conflicts because the level is not high enough to reach any American cities, but they’re obviously terrible in terms of suffering and blood-letting in those regions.  I think we’re going to see more of that.  The Russians and the Iranians, for example, are very good at teaming up in an effort to counter this dramatically growing American influence in the region.  When I went to Iran for my book I met a number of fairly important politicians and also met the Russian ambassador to Iran.  And I’d been up in Moscow a couple of weeks prior to that and spoken to the deputy foreign minister in Moscow, and he and the ambassador in Teheran, they all pledged the high importance on that Iranian-Russian alliance.  And you see that, for example, in the field of nuclear cooperation.  This has been driving people in Washington mad.  The Russians still supply the work and the know-how for the first Iranian nuclear power plant, which could quite easily be used for military purposes.  So, you’ve got to remember not everyone shares our own – and I’m not an American, but I live in America – our own somewhat self-congratulatory, idealized views of what we’re doing out there in the world, and why we’re doing it.  People in Moscow, people in Beijing and people in Teheran perceive our war on terror as a fairly arrogant, imperialist endeavor, and there is very little you can do to convince them otherwise.  Moslems, in particular, believe that this war on terror is a crusade against Islam.  So once again, you’re faced with this dilemma of pursuing your national interests – oil is one of which – and then paying the price for it.  [21:10]

JOHN:  Let’s try to piece this together and it’s very hard right now.  What is very clear, number one, Americans are looking at the Olympics and there is some concern about what’s going on in Georgia and elsewhere, and they’re thinking the price of oil is coming down, the commodity bubble has burst in that area, it’s over and we don’t have to worry about it.  In reality, if we go back to what we were talking about earlier in the Big Picture, when we begin to look at the real facts out there that we’re in trouble just on a scale of supply versus demand.  That’s number one.  Number two, here in the whole thing is we now have Russia potentially in control of the only pipeline that was not earlier in its control and is not being controlled by some country in the Middle East that may or may not like us.  That’s number two in the whole thing.  So how can we put this together because in the end this has not hit public consciousness as to where we are?

JIM:  No, and it was interesting there was a piece that came out of Stratfor this week and it was called Georgia, Russia, Checkmate.  And they’re talking about there is another Georgian city called Samtredia and it’s only an hour’s march from Senaki. 

Samtredia sits aside the Baku-Tbilisi pipeline, transit fees from which are a major portion of Georgia’s economic wherewithal.  But its military significance for Georgia cannot be overstated. 

Samtredia is where Georgia’s transport links to its only other ports, Supsa and Batumi, merge with its link to Poti. (Technically, Sukumi is also a Georgian port, but the Abkhaz have controlled it since achieving de facto independence in 1993.) Should Samtredia fall, Russia will have, in effect, enacted a naval blockade of Georgia without using its navy. The city is also the only land link of any meaningful size to Turkey. While Turkey — along with the rest of the world — does not want to get involved in the conflict, the capture of Samtredia effectively blocks any potential land-based reinforcements from reaching Georgia via Turkey.

Furthermore, there is only one road and rail line that leads east from Samtredia to the rest of the country. This transport corridor is, in essence, the backbone of the entire country. Should Samtredia fall, there is really nothing that can be done — by Georgia or anyone else — to stop the Russians from taking over Georgia outright, one piece at a time, at their leisure.

In essence, the Russians are a heartbeat away from being able to dictate terms to the Georgians without even glancing in the direction of Tbilisi.  [24:00]

JOHN:  So if we take a snapshot of this, Jim, and in just a nutshell, basically here it is.  World demand has far outstripped world supply.  That’s number one.  Number two, our demand levels here in the United States and some of the other western countries require that we import ever increasing amounts of oil.  And number three, the importing is being done in the midst of a very unstable geopolitical situation from countries who may or may not like us, and who could at any moment just turn the valve shut and say, “sayonara, lo siento, señoras, that’s it.  It’s over.”

JIM:  And it’s amazing too, it’s not just the fact that they control the supply, but also, remember that countries like the Chinese and the Russians control or own over a trillion – or close to a trillion - dollars of Fannie Mae and Freddie Mac; and as US diplomats were sort of yelling and trying to put pressure on the Russians, Putin came out on Friday and said, “you know what, we may just dump our bonds.”  Just imagine what would happen if the Russians dumped 300 billion dollars of Fannie Mae or Freddie Mac bonds onto the market place; what would happen to our financial market or interest rates here in the US in what is already a very dangerous situation within the financial system.  And I’m just absolutely amazed – and of course we’ll get into in this next segment with Eric King here as we get into the resource sector – that the world is asleep; everybody is watching the Olympics and nobody paid attention to the headline inflation rates, nobody paid any attention to the IEA report, or the ITC report that came out this week, that the price of energy is down on this Friday, and you just had the former premier of Russia say, “you know what, if you don’t shut up and get off our back here – this is our own backyard.  Get out of our backyard, otherwise we might just start dumping your bonds.”  [25:59]

JOHN:  So as we were talking earlier about resource sell-offs, and now that you’ve painted a totally dismal picture of the world, it looks like – remember, we were coming to the back end of the year, we were going to have the second side of the Oreo cookie theory here? – the dark outer shell on the second side is looking very dark.

JIM:  That is probably an understatement.  [26:17]

JOHN:  I can’t understate that any more, Jim.  All I can say is it’s looking very dark, dark dark.  There it is.

And in case you want to hear the whole interview with Lutz Kleveman, we are going to rerun that in its entirety on the show for August 30th when Jim and I are taking some time off. So you’ll be able to hear that in either the second or third hour of the program coming up on August 30.  I listened to the whole thing, Jim.  I was amazed as I listened.  This interview is five years old basically, and in listening to it there is very little that he said then that I would disagree with now.  He got a few things off, but nobody is a perfect prophet.  You know, there are a few things which were just slightly – he underestimated this or overestimated that – but as a whole he understood the situation.  So that’s coming shortly here in a couple of weeks on the program.

You’re listening to the Financial Sense Newshour at www.financialsense.com.  Coming up next, Eric King will be with us as the Big Picture continues.

  FSN Humor:  Joe Saturday

Ladies and Gentlemen, the story you are about to hear is true.  The names have been changed to protect the guilty.  This is the net.  Some people bash for pleasure.  Some bash because they think they can get away with it.  You never know.  My name’s Saturday.  Joe Saturday.  I’m a blogger.  I was working the day channel on the blog when I got a post from Financial Sense.  There had been a bashing.

FINANCIAL SENSE:  There has been a bashing.

JOE SATURDAY:  Yes, sir.  I just said that. What was it?

FINANCIAL SENSE:  My stocks.

JOE SATURDAY :  Your stocks.

FINANCIAL SENSE:  Yeah.  You know those things you buy when you want your share of the securities.

JOE SATURDAY:  The security shares?

FINANCIAL SENSE:  That's right.  We call them stocks in this business.

JOE SATURDAY:  Stocks scandal.

FINANCIAL SENSE:  What's that?

JOE SATURDAY:  Nothing, Sir.  Now, can I have the facts.  What kind of scandal would bashers share?

FINANCIAL SENSE:  They were short sellers, Sir.

JOE SATURDAY:  What kind of short seller?

FINANCIAL SENSE:  Naked short sellers.

JOE SATURDAY:  Why were the short sellers naked?

FINANCIAL SENSE:  They’re not really naked.  They’re insufficient.

JOE SATURDAY:  Will Viagra help?

FINANCIAL SENSE:  No, sir.  Not that kind of insufficiency.

JOE SATURDAY:  Sounds silly.

FINANCIAL SENSE:  It's not silly.  Insufficiency.  Their short stock stockpile is insufficient.

JOE SATURDAY:  Insufficient short stock stockpiles sold by silly short sellers.

FINANCIAL SENSE:  That's right.

JOE SATURDAY:  And they do this on the blog?

FINANCIAL SENSE:  Yes, sir, Mr. Sunday.

JOE SATURDAY:  I'm Saturday.  Sunday is my sole day off.  Let me get this straight.  They scribble shady sayings on the site to send securities short?

FINANCIAL SENSE:  There is one other thing.

JOE SATURDAY:  What is that?

FINANCIAL SENSE:  They do it at the last second of the trading day.

JOE SATURDAY:  The last second?

FINANCIAL SENSE:  Uh-huh.

JOE SATURDAY:  So short sellers scribble shady sayings in the last seconds of selling sending securities south for species sake?

FINANCIAL SENSE:  Sad, isn't it?

JOE SATURDAY:  Sure shooting. Sure stinks.

[29:11]

  Gold / Silver Bull: Shortages, Consolidation
and the Perfect Option with Eric King

JIM:  This has been a horrific week if you’re a gold investor.  There are two sides to that.  There were sellers and there were buyers depending on one’s perspective.  Joining us to comment on the metals market as a special guest – and I couldn’t think of a more appropriate time – joining me on the program is Eric King.  What do you say, it’s one of those weeks where you wanted to go out and kick a soccer ball? 

ERIC KING:  You know, that’s what people should have been doing.  This is not for the faint of heart.  And I’ll tell you something for listeners out there because I know that there is some stress that people are going through in relation to this because many of them are running their own lives and their own careers and what-not and they’re just invested on the sidelines in funds like Sprott’s or yours or otherwise through their own doings, but the bottom line here is this:  People need to decide that they’re invested in this for the long term.  Years.  [30:06]

JIM:  Eric, let me just stop you there.  When you say long term, you’re talking about years because today people could mean, “oh, a month, three months, six months?”  No.  Years!

ERIC:  That reminds of a great line from King of Queens where Carrie says to Doug, “We’re long term investors in this thing – we’re going to be in this for at least two to three weeks.”

So the bottom line is, yeah, years.  And it does vary depending on the person, but I think that the bottom line on this is that when people decide or when they make that decision – because I’ve told this story on the air before – I was in an investment, the stock’s down from 43 to under – I’m averaging $4.80 and it gets to a buck ninety-four and I’m down hundreds of thousands of dollars on the thing – and those are those gut-wrenching moments, Jim, when you have to go, “Did I make a mistake?”  And I went to look at the fundamentals and I actually decided the fundamentals had gotten better since the time I was making the investment and you know, it’s at that point where you have to say, they’re going to have to pry these shares from my dead, cold body because I don’t care what this stock does, I’m hanging on.  I knew the break-up value was over 7 bucks a share.  The stock later went up to 24 bucks, and I sold it at double-digit, but where I’m heading with that is you’ve got to be in this for years.  If the statement’s going to bother you coming in the mail because you know stuff is down, just take it and put it to the side.  Don’t even look at it.  Nothing says you have to go and look at those.  Just put them in a pile.  If you’re going to be in it for years, what does it matter if it’s up, down, sideways.  Of course, you want it to be going higher, but listen, this is what people need to understand because the professionals know this, Jim, and I’m talking to your average listeners now who may be a little worried now:  This is a long term, secular bull market, and in secular bull markets you are going to have these hiccups.  You are going to have these consolidations, you are going to have these almost what feels like the world is ending type corrections or crashes, and the bottom line is that Paulson has not solved the problems of this country; Bernanke has not solved the problems of the United States.  The United States is in a tremendously bad position, the IMF is coming in to do a forensic accounting of these books, they want to look at this country; I don’t think they believe the books as they’re being told, and there’s been some discuss on the show in previous interviews. 

So what is the real debt of the United States?  How bad are things really?  And as we go into a massive inflation like the United States is looking at now, which is staring us in our faces where we have to inflate our way out of this mess, before that happens they have got to take gold down – they’ve got to take silver down – and that’s what they’re doing right now because you can’t have that kick off with gold at 950 and silver near 20 bucks, so you’ve got to bring these things down.  And the professionals know that this was orchestrated.  They know that this was an intervention.  They understand that, and what we don’t want is for the people listening to this show to let this price action affect them.  Do not let this price action affect you.  Stick with the fundamentals.  Stay with the long term.  Do understand that even if gold goes into a ranging situation here –where it’s going to be range bound in this consolidation because it was up for seven straight years – that’s okay, but be in it for years.  Catch that next leg when it turns.  Catch that manic phase.  Catch that mania because that’s where the fortunes are going to be made.  Do not get scared out of this secular bull market.  [33:49]

JIM:  Let’s talk about a couple of fundamentals here because if you take a look at an accounting of the US government, in terms of cumulated debt, there’s 53 trillion dollars of direct and indirect debt; and then if you add to that, Eric, unfunded liabilities, Dallas Federal Reserve President Richard Fisher said, when you throw Medicare liabilities and add in those with Social Security, the unfunded liabilities of the United States were 99.2 trillion.  After adding in direct debt obligations from its borrowing, the total government debt is 110 trillion dollars, which is twice the amount reported in the government’s annual consolidated accounts.  And this is from Mr. Fishers’ account in May, and he’s talking about:  

Federal