"Zapata" George Blake
Professor Frederick Kagan, Author and Historian
TOPIC: Ahead of the Trend

JIM: Welcome to this month’s first year program of Ahead of the Trend. And Ike, what’s on deck?

IKE: Today, we have a very good friend of mine, Mr." Zapata" George Blake. I have known George for several years, and one of the most amazing things about him is that he has made some remarkable calls over the period of time that I have know him. For example, in the Summer of 2000 when everyone was screaming and yelling about being long stocks like Juniper, my good friend Zapata George shorted Juniper and shorted Juniper north of 200 dollars. Then about 3 years ago he was the very first one to predict that oil would hit $70 per barrel, and when our audience heard that we got lots of email and phone calls telling us we were crazy. And then also George was one of the very few who was pounding the table to buy Newmont every time Newmont was below 20 bucks and of course we know what happened. So, I don’t have any more to say. He’s one of the most remarkable people I know of. So, without any further introduction, my good friend, Mr. Zapata George. Hi George, how are you?

'ZAPATA' GEORGE BLAKE: Whoa! I’ve got a lot to live up to there, fella.

IKE: Yes, you do.

JIM: You know, George, I was noticing in your background. You have a geological and engineering and a minor in petroleum engineering from the Colorado School of Mines. So with that background, I’m going to move into two of my favorite areas of investing and I want to talk about the oil markets today. And one thing that we have seen is – and I can’t tell you the number of analyst reports that I see –  they’re still looking at forecasting earnings for energy companies [based on] anywhere from $35 to $40 a barrel. And today we’re looking at oil prices much higher than that. Give me your take on the oil market if you would.

GEORGE: Well, you see the problem is that they do not understand the basic underlying problem. They are viewing the markets in what has been their historical perspective of the immediate past. Now, history’s a good teacher, but you have to look not only at the intermediate but the long term. We are having a collision of the biggest demand force in history, ergo Asia, colliding with what is now the plateau of the curve of max oil production. A gentleman back in the '50s predicted that we would arrive at this place sometime between '04 and '10. Well, folks, we’re there. The gentleman accurately – he was geophysicist for Shell Oil Company – predicted that peak production in the United States would be in 1970. It occurred in 1971. So, we have these two opposites coming together. And this is the basis on which the world is purchasing energy and American analysts are missing the point. [3:33]

JIM: You bring up something that is very important, and something I believe in rather strongly, which is peak oil. What amazes me is I was watching this week an automobile show where GM just introduced a camero that’s a big gas guzzling car, and they’re talking about a whole new lineup of SUVs. Why is it do you think so many in the world, whether it’s people on Wall Street, or it’s manufacturers such as General Motors [don’t get it]. I think Toyota gets it, but GM hasn’t gotten it yet. Why do you think many people don’t buy into the peak oil argument, yet we saw November of last year, Kuwait announced that their largest oil field had peaked, and 55 of the 65 major oil producers in the world had peaked production. We haven’t had any major new oil discoveries. We stopped replacing our oil that we consume each year – since 1985 we’ve been running deficits. What is it that people aren’t getting?

GEORGE: Well, do you remember the story about the little boy that cried wolf. They ignored him didn’t they.

JIM:  They sure did.

GEORGE: Well, you see the problem is in the '70s with Mr. Carter sitting in his sweater in front of the roaring fireplace announced that we had a serious problem that we had an asset that was non-replaceable, and that we were eating it up. And so they brought in some oil company folks and they said, “yes, this is a non-replaceable asset and we are eating it up.” Well, then of course it turned out that we had all kinds of oil. That was an intermediate term occurrence. Everybody assumed that it was the truth, therefore the next time that these clowns try to trap us into that argument they’re not going to fool us. So, Bingo, there you are. Now that it’s come to be the truth, those of us who know and understand the situation, we’re going to be the little boy that cried wolf, because we’re out there crying it again.

JIM: You know, George, as you look at the oil markets though, the one thing that I think has a lot of people swaying against the peak oil theory or these price spikes that we’ve seen is [oil prices always come back down]. If you look at the price spikes that we had maybe around the time of the first Gulf War in 91 we got $40 oil; we got it again at the next Gulf, at the second Gulf war; we had a brief spike in the year 2000, but oil always came down. And certainly after we got up to $70 oil after the hurricanes this Summer we came back down to 55, so anytime it spikes it’s always come back down. Do you think there’s some belief there that, “well, you know, maybe if we just wait long enough this will all settle out and we’ll be back to normal again.”

GEORGE: Well, unfortunately some of the folks who have control of the electronic media have made statements like, “well, you see supply follows price, if the price goes up the supply comes on.” Well, you see this is going to be the time that that quote doesn’t happen. I realize that to say that something is the first time I don’t subscribe to that theory either. There is nothing new, there is nothing new about this situation, except the fact that we have unprecedented demand. Absolutely unprecedented in the history of the world  and it is colliding with the reality of a resource that is not regenerating itself. There is a limited amount of every hard asset on the face of the earth. This is not an unlimited supply source. There’s only so much copper, there’s only so much oil, there’s only so much natural gas, and friends, I’ve got news for you, there’s only so much clean water. Yeah, it gets renewed more than oil but still if we contaminate the source of the clean water we got a serious problem. [7:42]

JIM: You know you bring up something George that I think is really different this time around, and that is the tremendous demand that’s coming from China and India, with China now being the second largest user of oil in the world. That didn’t exist 15 years ago, we didn’t have to worry about China. And  don’t you think that some of the analysts tend to view the oil markets from the perspective of a US-centric view? In other words, if the US goes into recession there will be less demand for oil, so therefore the price is going to come down, but they’re not looking at what China’s doing.

GEORGE: You see you have just described a condition that I have spoken and I have spoken up on his program, I call it NAM . NAM is North American Myopia. Those of us who live in North America are unable to see the world. Well, folks, I have news for you. I’ve been around for a long time. We don’t live in the United States of America anymore if you have any money, you live in the world. And the only way that you’re going to protect that money is to realize what’s going on in the world. You’ve got to look outside of this continent to know what’s happening. [8:56]

JIM: This brings up an interesting issue and something that Matt Simmons talked about in his book Twilight in the Desert. The thing that really surprised me, George, is this summer when we had hurricanes Katrina and Rita, where you basically had one-third of the energy production of the United States taken offline, and as you and I are speaking on this day it’s still isn’t fully up and running. Some of…not all  of our refineries have fully recovered. You would’ve thought with something like that happening Congress would have eased controls. There was a bill that was up for a vote right afterwards on easing the gazillion permits to put in a refinery outside a hurricane belt, or maybe to take the 50 types of gasoline we have and maybe get it down to one or two, or to make it easier to go and explore for energy. All of that was vetoed down overwhelmingly.

GEORGE: That demonstrated the powerful intellect of those folks which the people of this country elect. They have no one to blame for their problems but the people that they themselves elect. [10:09]

JIM: What happens, in other words, if we’re in this heating cycle that is occurring in the Atlantic Ocean, and we know that heat drives hurricanes and we’ve got another hurricane season coming up, and we’ll have another Winter. And one of the things that we’ve seen is – had it not been for Europe sending us over refined products – not only are we importing more oil and natural gas into this country, but now it’s necessary to import gasoline refined products from unstable areas of the world such as Venezuela, because we haven’t built a refinery in 30 years.

GEORGE: We’re importing 50 or 60 percent of our crude oil now. Well, first of all that’s a fib. Now, if you say, of all of the petroleum products that we use, what total portion, crude and finished, and you’re looking at over 70%. We import 70% of our liquid hydrocarbon needs. I’ve got news for you folks, we live in the world, we can’t be dependent on foreign oil. I got news for you, that’s the only kind that there is. So, to make a statement like that demonstrates the fact that you don’t understand the problem. And I hear it on the TV media almost every day, they don’t understand the problem. [11:35]

JIM: What is amazing is big as the United States is, both economically militarily and as crucial as energy is to a modern industrial society, even a technological or service based society as the US  has become, other countries, whether it’s Norway or Europe are taking steps, they’re expanding solar, they’re expanding wind; Japan, China, are building nuclear power plants. They understand this energy situation. We’re doing nothing.

GEORGE: This is one of the problems. When reality finally comes to America, yes, then we will begin to do all these things. The problem will be is that there will be a huge lag time, and during that lag time we are going to see prices literally skyrocket. [12:30]

JIM: We’re looking for the next big energy spike, we could see 80 and $100 oil, and I don’t think people realize how quickly or how soon that could come. Would you subscribe to that view?

GEORGE: Well, I have stated on Mr. Iossif’s show, that the next intermediate stop for crude is $83. I’m already on record with that. [12:53]

JIM: So, if we get incremental strong demand coming from India and China this year and if we get, for example, another bad hurricane season [then] people who were shocked at $70, they’re going to be shocked if they see $80 this year.

GEORGE: Those catastrophic things we don’t even have to have. One percent of the people in the world control 80% of the assets, and that’s a fact. You don’t ever see…you don’t ever interview those guys, Ike doesn’t either, and I don’t talk to them on the phone. You know why? Because they don’t tell anybody what they do. And you see, they are the buyers of these assets. Now, lets face it. There’s a new sheriff in town, folks, and his name is China. Now, again, you may have North America Myopia, and you may not wish to accept that fact, but it is the truth. They purchase 70% of all the cement in the world. When you’ve got somebody doing that, if they’re not already the 800 pound gorilla, they’re going to be. So, we must wake up to the fact that demand, demand, demand is the problem here. I hear people speak of conservation. Let me ask you this, Gentlemen, what difference does it make, how much 200 million people save, if 2.3 billion people are increasing the use of that same asset? Huh?

JIM: It almost becomes inconsequential.

GEORGE: It is inconsequential. But yet they talk about this. What? They’re flapping their gums.

JIM: Well, getting to this situation the one problem that I see with this – because we are the largest military in the world, we are the largest economy in the world, per capita – with 5% of the population [we are] consuming 25% of the energy. I don’t think people understand, when you reach peak oil it doesn’t mean you run out of oil, it just means if the demand for oil is 85 million barrels, and you can only produce 80, that means 5 million barrels will have to be taken out of the demand structure. How does the world, George, get to a situation where you peacefully allocate and put everybody on an allowance? Nation states tend not to do things that way.

GEORGE: Well, you threw a key word in there, and that word was peaceably. If you had not put that word in there I could answer your question. Unfortunately, you did. You see, when you cut off the oil to any nation as the United States of America did, about 6 to 9 months before World War II, when they cut the supply line from Indonesia to Japan, it causes those folks to react. Well, we say, “Oh, the Japanese attacked us without provocation.” I’ve got news for you, cutting off somebody’s oil supply is provocation. Now, if we’re dumb enough to try to do something like that again, we’re going to suffer really bad. But let’s take the peaceable scenario. If you notice, we have troops in oil producing countries on some kind of mass destruction type thing, but the underlying truth is not just oil, it’s cheap oil. Whereas, since the election of the new Chinese Premier, 3 years almost now, he has spent over 60% of his time on the road. Where’s he been? Oh, he’s been places like Gabon, and Iran, and places like that. What’s he been buying? Millions of tons of oil and natural gas production as fast as he can do it. They just did it in Nigeria 3 days ago. [16:56]

JIM: Yeah, they bought a considerable portion of that new oil field.

GEORGE: Well, you see they made a deal in Australia, it’s been two years now. The big dog himself met with all of the BHPs and everybody out of Australia, and he said, “fellas, how much iron ore can you produce.” And they told him. He said: “We’ll take that much for 30 years. That much per year for a 30 year deal, world price, you know, we’ve bet decline and oh, we’re going to furnish you with some exploration money. The only thing that we ask is that we be first in line at world price.” Whoa, interesting concept, huh, folks? While we’re out putting troops in the field, they’re out spreading money around. What’s that about you can catch more something with honey? I remember something like that.

JIM: Well, I can tell you if we take a look at their success over the last couple of years – whether it’s going into Venezuela, the Canadian oil sands, Gabon, this week in Nigeria, the Sudan, Iran, the Kazakhstan pipeline, which they secured a deal now they will have 15% of their energy coming from the Caspian sea – it seems to me, George, because of our lack of political and economic intelligence, the only outlet we seem to have drawn as our energy policy is carrier battle groups, and troops on the ground.

GEORGE: Well, you remember how well our intelligence, they announced that the USSR was still a viable enemy and that we must spend hundreds of billions of dollars and…“Oh, whoa, what happened?” “Well, the Berlin wall just fell down.” We ain’t had any intelligence in so long I don’t even want to talk about it. But, let me tell you something about a war problem. Shanghai agreement was recently signed by six parties: Russia on the North; China on the South; and the four Stans in between them. In essence, what it was, this is a mutual assistance to go to war if any of the six of them are attacked. Well, obviously the real truth was that Russia and China just signed a mutual defense treaty. But did we hear about it in our press. No. it’s the Shanghai agreement, it’s open knowledge. You know, it’s not a secret. [19:31]

JIM: Let me bring up an issue that is foremost, even our press is starting to cover it. And that is the Iranian situation with their nuclear power plants. The US and Israel, especially when you have the Iranian President saying he’s going to wipe Israel off the map, what happens if either the US or Israel goes after Iran, and Russia and China have agreements with Iran. Does this bring us closer to world war.

GEORGE: Of course it does. Let me tell you what is a real enemy of the financial world. In Teheran, in March they are opening a Nymex trading room where they will settle all oil transactions in Euros. This will happen. The condition that you suggested might not happen. The one I’m talking about is guaranteed to happen. The consequences, although loss of life won’t be involved immediately, the economic consequences are a further slaughter of the US dollar. As we lose our reserve currency status around the world we come close to Mr. Bernanke’s helicopters. [20:51]

JIM: Well, it’s interesting, I’m looking at a graph as we speak George where the M3 figures are growing at an annualized rate of 25%, and M3 is just spiking, and it’s just maybe coincidental but beginning March 22^nd with Bernanke’s first FOM…

GEORGE: We don’t get those figures anymore, do we?

JIM: No, so what does that…

GEORGE: Hey, Jim, why don’t we get those anymore?

JIM: Well, I don’t think they want the world to know how much we’re printing.

GEORGE: You know, see, this is what amazes me. You and I know about these things, but the public says, “well, that’s meaningless.” The commentators on the TV say, “Oh, those foreign trade [figures], that imbalance thing, they’ve been reporting that for 15 years. It’s silly, it’s stupid.” Well, folks, I’m going to give you a good analogy, here. We all know, or we have all been where we knew somebody who lived good, ate a lot of cholesterol, did it for 15 or 20 years, it wasn’t a problem. was it? [JIM: No.] Either they died or they had quadruple bypass surgery.

Well, you see, these things that drip, drip, drip, like money supply, like trade imbalances. Oh yeah, they build every month. The problem is they’re not resolved by stock market corrections like you and me and Ike and everybody’s used to where you have something, you know, and then you recover, and then you know you build a base, blah, blah, blah. They end in catastrophe. Well, somebody told me, he said, “well, you know, this catastrophe thing never happens.” And I said, “well, why don’t you go to South East Asia around the Bay of Bengal and ask, you know, about a quarter of a million people which catastrophe never happens.” Well, you can’t ask, they’re all dead. Catastrophes do happen. The fact that we haven’t seen one in a while doesn’t mean that they’re not going to happen again. And this is… I meet with my subscribers to my newsletter who are saying, “Man, you can’t talk about that, that’s not going to happen.” Well, it does happen, folks. It does happen. [23:10]

JIM: You know, it reminds me of a gentleman who used to work for me, formed a company, got bought out during the dotcom era and retired to Florida on this little island of Sanibel and all kidding aside, in July of 2000 and 4 he came to visit us and I said, “Keith, don’t you ever worry about hurricanes?”

“No,” he said, “it’s been over a decade.” He goes, “they’re rare.”

The following month Sanibel island was wiped out by Charlie.

GEORGE: I’ve been there and it is…it was one of the loveliest spots on the Gulf.

JIM: Well, let me bring up a scenario. We’ve got this situation with the Iranian bourse trading oil, settling other than US dollars, which takes financial power away from the British and the US, because London and New York is mainly where oil is priced. We’ve got that coming on board. We’ve got the money supply has increased by almost what? Has increased 208 billion in 2 ½ months. We’re not going to report it anymore. Our current account deficit is now getting close to $1 trillion. Let’s talk about gold for a minute, because it seems like now you’re seeing not only gold hit new records, but it’s also going up against major currencies. And similar to oil they’re not finding enough new gold, and producing enough gold to meet the [demand] that’s coming on from the very same places we’ve been talking about: demand coming from China, demand coming from India, demand coming from OPEC whose trade surpluses are larger than Asia.

GEORGE: Jim, I know that this is impromptu, and you may not want to do this, but could I play a game with you?

JIM: Sure.

GEORGE: OK. The year is 1896. OK?

JIM: OK

GEORGE: I want you to tell me the answer to 3 questions. How many people live in New York city. How many people are incarcerated in the United States for drug offenses of any kind? And how many countries in the world, major currencies, are not backed by gold.

You can answer them in any order you want to.

JIM: Most of the currencies in the world are backed by gold.

GEORGE: At that time they were, so the answer to that would be what? Let’s say zero, [Jim: Zero] because all of them were backed by gold. OK, how many people lived in New York city.

JIM: I would say maybe 200,000.

GEORGE: OK. How many people were incarcerated in the US for drug offenses?

JIM: None.

GEORGE: OK, the answer to all 3 questions is zero. The reason that there weren’t any drug offenses is that there weren’t any laws against using drugs, and the reason there wasn’t anybody living in New York city, they didn’t incorporate New York city until the next year.

JIM: OK, well, I got 2 out of the 3 I think.

GEORGE: Yeah, OK, and most people don’t, by the way. But now, in a hundred and 10 years, we have completely reversed those 3 things. And the most important one that we want to talk about is now there are no countries that have their currency backed by gold. It’s gone from 100% to zero percent. Now this last year, you’ve already brought up the point that we had a strong dollar and strong gold. Whoops! That doesn’t make sense. What’s wrong with this picture? What’s wrong with this picture is this: the printing of currencies world wide is virtually unlimited. Those people who know what to do with their money, recognize this phenomena, and they are hedging that position. They are purchasing gold, silver, oil, coal, copper, all of the hard, all of the real assets of the world. [27:04]

JIM: What about the drugs?

GEORGE: Now, there’s a good hard asset. Maybe we ought to talk about getting enough in us…Oh, I thought you meant the major pharmaceuticals, that’s what you meant.

JIM: George, one of the things, if you were to talk to somebody, you know price action begets interest in the market. Gold goes over 300, yeah, you get a few more buyers, gold goes over 400 a few more people notice, gold goes over 500 a few more people notice, it hits 600 or 700 hundred, and a lot of people notice. Yet, if we look at gold itself, if you have this incremental demand, that comes on globally. China, India, OPEC, where [there is] all the surplus money and savings, plus you know wealthy people in this country, hedge fund managers and even the general investment public. You know how long it takes – being a geologist – for a mining company to go make a new discovery, go through the permitting process, drill out the project and then turn it into a mine. We’ve got, in my opinion, the same issue with gold that we have with oil.

GEORGE: This thing that you’re describing [is what] we in the hard industry call ‘lag time’. The lag time in all of these things is enormous. You do not go into the oil field and turn on the tap, and have oil flow out of it. First of all, you’ve got to find the prospect, then you’ve got to buy the leases, then you’ve got to get the permits, then you’ve got to get enough money to do it, then you have to get the equipment, then you drill a damn dry hole! Oops, got to start over. [28:52]

JIM: And you know, you’re talking about something today that most people don’t realize, oil companies are having a hard time getting the equipment.

GEORGE: Well, you see when we did the price collapse back when Mr. Volcker, under the power of Ronald Reagan destroyed the domestic oil business, you destroyed all the infrastructure and machines of that business. I happened to be in the business at the time. I very well know of which I speak. [29:20]

JIM: Wow. So, if you’re looking at gold, and we all know it takes time to bring on board – I’ve heard figures if you did everything right, if you had things worked out well, and you’ve got a government that could speed up the process, you’re maybe looking at 3 to 5 years minimum.

GEORGE: Yes sir.

JIM: So, when we’ve got helicopter money coming into the market as we do today, it looks like one area that some of that money is going into it is the gold market. Yet, if you take the capitalization of all the world’s gold companies, and even the annual production of the bullion itself, it’s peanuts compared to a company like General Electric, or an Exxon-Mobil, or a Microsoft.

GEORGE: You better believe it. There’s not enough room for all of this cash to wash into, is there? [JIM: No]. Well, eventually…

See, when they finally do get the idea they will blow the lid off. And that’s why some of these numbers…and I don’t openly discuss my long term numbers because I literally frighten people to death, so I only speak of the intermediate term but you see, you have just made the argument for the long term number. [30:31]

JIM: In terms of intermediate terms numbers we’ve talked about oil 83 to 100, people like Matt Simmons are saying by 2010 we could see $200.

GEORGE: My target in there is somewhere around $166, but I put a caveat on it: that there is no major problem with US currency, prior to that time. [30:58]

JIM: So, if we have a currency issue we could be seeing you know oil beyond $200.

GEORGE: You could see see the currency issue puts a multiplier of 10 on everything. The sun never set on the Union Jack in 1885, did it?

JIM: No.

GEORGE: OK, before World War I the British were the power of the world, and it cost over $10 to buy a pound. By the end of World War II it was evident that we were the boss. And by 1981 you could swap a dollar and no pennies for a pound and no pennies. You remember that day?

JIM: Sure.

GEORGE: OK, in essence we had a more than 90 cent decline in the value of the British pound versus the emerging power of the United States dollar. True?

JIM: True.

GEORGE: Now, we were the dog. We know who the new sheriff’s going to be. You know, he keeps his keeps his office in Beijing in there. Now, this same thing is going to happen between this century’s strong currency versus last century’s strong currency. We already have the historical precedent in place so that we know what the story’s going to be. See, I’m a great believer in Blake’s number one rule of investing is human nature never changes. OK. Blake’s number 4 rule of golden investing is that there’s only one money, it’s called gold and silver. Now, you put those two things together and you say, “whoops, we already know what the plan is.” Our currency is going to decline 90% against their currency. Well, that’s what’s going to happen. It’s not maybe, it’s not ‘well, it might’, it’s going to. We already have the historical precedent, there’s no reason to believe that it will change. It will go that route. It has to. It doesn’t have any choice. Therefore, those of us who wish to protect our wealth, our children, and our grandchildren, we got to do something about it. We got to make some plans. And we got to make some plans not for 6 months from now but for 6 years, and 16 years from now. [33:11]

JIM: George, we’ve been talking about intermediate prices. If we talk about intermediate prices for gold and silver. Do you feel comfortable throwing that out there?

GEORGE: Yes, we’re looking at a $600 figure for gold, just over the horizon, and we will be looking for 900 to 1200 by the time we get to 2010. Now, silver in my opinion is the biggest bargain in the commodity world. And I will give you one long term  prediction, and that is for silver and this again is without the currency. OK?

JIM: Alright. 

GEORGE: On December the 24th, 2039, on the New York Exchange, when traders go home for Christmas, silver will close at $233 an ounce. [34:03]

JIM: The year is 2039?

GEORGE: December 24, 2039. Why do I say that? Am I being silly? To a certain extent yes, but you remember our old friend W. D. Gann?

JIM: Sure.

GEORGE: He’s the sixty-year cycle man on silver, right. He made his killing in the 20 bull and bear market of silver. When he went to his grave in 1955, he said silver will make a peak in 1980, I think he may have been right. Well, add 60 to 1980 and you get 2040. Well, I said  December 24^th, 2039. I’m just being a little bit silly because that’s 2040, right? [Jim: sure] If you take the same multipliers between the 1800 peak, the 1920 peak, the 1980 peak, and the peak that I just mentioned, you come very close to $233 an ounce. So, we have historical precedent, we have Mr. Gann on our side, there’s one long term prediction I’ll give you today. Obviously, between its present price and there there’s a lot of room to move around. [35:08]

JIM: Can I wiggle out a long-term gold out of you?

GEORGE: Ha, ha, no! I gave you the one I’m going to give you.

JIM: Let me go about it the roundabout way. What about the gold to silver ratio?

GEORGE: At some point we will return to 15 to 1.

JIM: So what was your long-term price on silver?

GEORGE: I’ve forgotten.

JIM: You know if I take something like 238 times, let’s go with 16, you’re looking at almost $3,800 or $4000 an ounce.

GEORGE: I want to congratulate your elementary school teachers. They did a fine job with your arithmetic.

JIM: And I did that with a calculator, too.

GEORGE: Oh, Oh, that’s cheating. That’s cheating. Your number’s probably not right.

Now, I will tell you one thing that is going to happen. The Dow Jones Industrial Average and the price of one ounce of gold just ever so often kiss each other. And I wouldn’t be surprised to see that happen again, too. [36:13]

JIM: Let me throw a counter argument to that if I could, George.

GEORGE: Sure.

JIM: It is something thing that we saw in Germany in the 1920s, when they had the equivalent of helicopter Ben Bernanke running their money supply.

GEORGE: Yup.

JIM: They printed so much money – and people remember the stories of wheelbarrows full of money wouldn’t even bother anybody.

GEORGE: The price of everything went up.

JIM: But you know the German stock market also went up in nominal dollars, not in real dollars, but it went up.

GEORGE: That’s why I always supply that caveat – without a serious disaster of the American dollar. You notice I’ve mentioned that caveat a couple of times.

JIM: Sure. If we get a dollar crisis and people like China that have like 800 billion in dollar reserves, and Japan over a trillion dollars of dollar holdings, if they decide we’re not a good bet anymore, and they decide not to finance us, or even worse to dump some of their holdings –China just announced recently that they’re going to be diversifying out of their dollar holdings, they may not be selling, but they’re getting $15 billion a month in dollar reserves so if they decide to put a third of that, or a portion of it into gold, and not even finance us – that doesn’t leave any other choice, since there’s absolutely no fiscal responsibility in Washington but for our friend Helicopter Commander to start chopping down the forest.

GEORGE: Ah, unfortunately, for most of us I suspect you are exactly correct. And the reason I say for most of us is because every program that I’m on, every letter that I write, every meeting that I go to where there’s more than two people, I try to tell folks, “look, I know it’s hard to imagine that this is possible, but if you will just please take some sort of a hedge in that direction, you’re going to be awfully glad that you did.” [38:22]

JIM: Well, looking at this hedge, we both I think are in agreement that energy is a fabulous buy, and even though people are a little bit concerned prices are high. As you have had to tell them and give them a reality check, it’s going to get worse.

GEORGE: That’s the only thing that can happen. It can’t get any better. People say, “well, why do you say that?” I say, “well, for the simple reason we have 2.3 billion people have discovered the Henry Ford effect.” “What are you talking about, George?”

Well, before Henry Ford only rich people could afford extravagant stuff. He made it possible for the average, every day, wage holder to purchase an automobile. Well, you see there’s only two kinds of consumers in the world: when you’re born you got a mouth and everybody’s got to feed it; but some  of us achieve the status of the Ford consumer, we can purchase an automobile. An automobile requires many of the Earth’s resources. But the tough one is that thing that’s hanging on the side there that’s called the gasoline tank. It continues even after we purchase it; we must feed it. Now, when Volkswagen announced about a year ago, that they were going to build a Volkswagen plant in China where they would be capable of building 1.6 million Volkswagens a year for internal consumption, I called the President of Volkswagen in Germany, and I said, “Sir, I don’t want to take a lot of year time, I just want to ask you one question. All those Volkswagens you’re going to build in China is each and every one of them going to have a gasoline tank?”

And he said, “yes, they are.”

And I said, “that’s all I wanted to know.” 

Well, see that’s the answer to every question. There’s going to be 2.3 billion people. India and China by the year 2050 will have 1 billion automobiles. Now, they’ll probably be of the 2 cylinder variety, but still, every one of them is going to have a gas tank. Or they’re going to have to plug it in to the electricity at night, or they’re going to have to get their electricity off the road way. Now, all these things are possible, but we’ve got to start doing something now and we haven’t started. See, there’s a thing called methane hydrate. Nobody, you don’t hear anybody…have you heard of pebble bed technology? [40:57]

JIM: I’ve read something about it. I’m not real familiar with it.

GEORGE: OK, at a university north of Beijing which is their MIT place, a Professor said, “I have perfected the concept.” And they said, “well, we’re not going to build it here.” So they contracted a bunch of folks out of South Korea. They are building prototypes that will generate about enough electricity to supply one of our towns of about 4 or 5 thousand people. These are mini stations. They’re little bitty things. But you can hook them up in series. Well, see, you can take that technology and you could put one of those every mile in the middle of the road, you wouldn’t even see it, and then figure a way to pick up the electricity from the road bed, and you could run cars on it. But, you haven’t seen anybody doing that, have you? No, it’s just like the mislabeled [Colorado oil shale], you’ve heard of the Colorado oil shale? [41:50]

JIM: Sure.

GEORGE: It’s not a shale, it’s a marlstone, OK. Let’s correct that misconception. Right now, Shell has a pilot plant running out of Rifle, and they are producing some beautiful crude oil. Now, they have a whole bunch of tightly spaced holes, and they’ve got some severe down hole heaters in about half of them. Well, how much electricity are they putting down there to get that oil back? I don’t know. They’re not talking to me. But they say it might be commercial by 2010. Well, I got news for you, that’s not tomorrow. All of these things have that lag time that we’ve been discussing every two or three minutes, so prices in the interim are going to run rampant. It is mandatory that those of us who are in our business make our people that we talk to aware of this condition, so that maybe they’ll get the idea and go along with us. [42:52]

JIM: Since you come from a geological background, we’ve been talking about oil, we’ve been talking about the implications of precious metals, but it seems to me that – I heard for example Ross Beatty, the President of Pan American Silver talking about we may be talking about peak copper, so – it’s a lot of these natural resources that we take for granted. If we want to build a computer box, or something, we just assume that the steel, the iron ore, the copper’s going to be there, but aren’t we running across the same problem in other metals. I mean when was the last time you heard somebody building a large nickel mine, or zinc mine.

GEORGE: Well, I run a little hedge fund. Our largest number of shares is in a Canadian mining company whose primary prospects are in copper. Now, they have enlisted as a partner in this first mine, guess who? Korean Resources.  A company that is funded by the South Korean government to find natural resources for other Korean industries. Well, if it was so plentiful would the government of a country have a publicly held company but a government sponsored company out doing JVs, with 2 bit mining companies out of Canada, so they can get some copper out of Peru? See, every time that you go back to the fundamental workings of any of these things, they take on this world-wide complexion, and that’s just exactly what you’re talking about here. Again, there is a limited amount of copper that’s deposited on good, old Mother Earth. It’s going to get dearer, and dearer in price and it’s going to get harder and harder to find. [44:48]

IKE: George.

GEORGE: Yes sir.

IKE: Given everything that we have said about oil and gold, how do you explain the continuous exuberance in the stock market? I mean the Dow is above 11,000 and yet the things that we all talked about the last 50 minutes to me are quite obvious.

GEORGE: Well, have you noticed that the transportation index is virtually an all time high every time you turn around.

IKE: Yes.

GEORGE: Well, what they don’t realize is that we are transporting foreign goods. That’s why there’s so much activity in transportation. See, reality just does not seem to hit home with anybody, and this of course, I guess, is the true definition of a bubble. China’s trade surplus triples to one $102 billion, it was just announced on the television as we speak. Can you believe that? [45:48]

IKE: Yes, I can.

JIM: So, the transports mean a lot of trucks are on the road, but the boxes are made in China.

GEORGE: Bingo, and you see that’s something analysts just for some reason say, “well, you know, the industrials will confirm that, you know, we believe that, they’re headed higher.” The industrials have been trapped if you look back 7 years you got zero movement, you know. [46:12]

JIM: This is something that we’ve seen also with the large blue chips. Like you look at Coca-Cola peaked in 1998. A lot of these companies have gone nowhere since that time.

GEORGE: Well, look at the Aluminum company, they announced their earnings, right? Now let me ask you a question. What are the two most expensive ingredients in finished Aluminum?

JIM: Energy is one of them.

GEORGE: Electricity is number one. And employee cost is number two. Bauxite, the base of it, is meaningless in the cost. Well, let’s attack the labor situation. Who has the cheapest mass labor force in the world? China. Now, China has – this is a true statement – the largest energy source this side of the sun, it’s called the Three Gorges dam. Now, the dam is completely built, but the last generator won’t be generating until 2007. I got news for you. At the base of that dam I will guarantee you that there’s more than one aluminum plant, because you know you lose you lose juice if you transport it too far. So, right at the base of that dam, there’s aluminum plants, so they bring the alumina to the plant, they’ve got the cheap labor, they’ve got the cheap electricity, and bang you’ve got instant aluminum. You couldn’t horse whip me with a wet rope to get me into the aluminum business for the next 20 years, you know. [47:43]

IKE: Let me ask you something, George. Something that I get from many of overseas investors I know is a reluctance to invest in the US. And the main reason for their reluctance against is this: they talk about what you said earlier and this [inaudible] in which we depend upon who [inaudible] to secure our oil needs when others like China they’re doing it by paying money.

GEORGE: Yeah, which would you rather have?

IKE: Well, the money.

GEORGE: Have a US soldier in your back yard or would you rather have a million dollars in your bank account?

IKE: The answer I think is obvious.

GEORGE: I think it is too. We’ve got the wrong approach folks.

JIM: But you know, George, once again one of the problems that we have with energy is we aren’t building refineries, we’ve got 50 varieties of gasoline, so if you got refineries that are taken out as a result of a hurricane on the gulf coast, you can’t have other refineries in the rest of the country make gasoline and get it to the area because depending on which region of the country you’re talking about, they may have their own variety of gasoline, that is especially environmentally concocted for just that area of the country.

GEORGE: We have 300 xy as our main brand.

JIM: Yeah, so we’ve got all these Heinz 57 varieties of gasoline.

GEORGE: Yep.

JIM: We’re not building refineries, and then of course somebody says, “well, you know, why build a refinery when you’re running at peak oil?” [Because] you’re going to start processing shale oil, or you’re going to start processing oil from the tar sands, and also you have most of the oil that’s being found now is of the heavy, crude variety, instead of the light sweet variety, and the fact that you’ve got 50% of your refinery capacity along the gulf coast.  You know, whether you’re looking at refineries, whether you’re exploring for oil and gas off the West coast of the United States where there’s still plenty of oil and gas reserves, or you’re looking at putting wind turbines up, and the people are afraid that some bird’s going to get killed with a wind turbine, or you, you know it doesn’t matter what you’re looking at in energy you’ve got to [start doing something] – OK if we’re going to be an environmentalist then let’s come up with an environmental standard that we can agree on but let’s start doing something.

GEORGE: In Washington, if it’s OK right now, and you can put off until the next election where you get to come back, then you’re going to put it off, it doesn’t make any difference what it is, you’re going to delay it. Unfortunately, there are some of these things that have been delayed and been delayed and been delayed, and they will finally, come home to roost, believe it or not.

JIM: You know, if you take a look at the 70s, when we got the oil embargo in 73, that was sort of a geopolitical situation, but throughout the 70s as the price went from a buck and a quarter or 70 cents a gallon or whatever it was, and all the way up to 40, you know, all of a sudden, oil companies took action, Congress took action. We started doing something, we started building nuclear power plants, we started insulating our homes, we started using solar, we started conserving, but we also started exploring. What are the chances of maybe we try to do something about it, but we do something stupid. So they’re going to go to the oil companies and say, “you know what, we’re going to tax you.” I mean, never underestimate the ability of a Congressman to do something stupid.

GEORGE: I realize that what I’m going to say next is facetious, but think of this: suppose that the oil companies were faced with all of this…blah, blah, blah… and they said, “OK, we’ll make you a deal, you buy us out at the current market, and you guys – the government – run it.” [51:43]

JIM: Oh, my God, that would be a nightmare.

GEORGE: Oh yes it would. You see for the American public it’s easy to make the oil companies their whipping boy. They have been ever since I can ever remember. Well, the oil company, I can remember when gasoline was 35 cents a gallon, and a special delivery letter was 35 cents. Well, now, which do you think costs more to do? Find, produce, refine, and ship a gallon of gasoline to Boston from Houston, or do you think it costs more to get a special delivery letter there? Well, see there’s a perfect example of American enterprise versus the government at work. Those two things cost exactly the same price at that time. Well, I believe that we can see the imbalance in that situation. Virtually, it has not changed. America has had the benefit, let’s face it, we have the cheapest gasoline in the world. We also have the best gasoline in the world. We have the most reliable supplies of gasoline in the world. [52:57]

IKE: Let’s bring this down to today’s prices. How much does it cost for a gallon of oil?

GEORGE: Well, it depends on where you are.

IKE: Well, let’s say here in California, or in Texas.

GEORGE: Ok, for a gallon? [IKE: Yes] of crude oil?

IKE: Yes, OK, I’m sorry a gallon of gasoline. My apologies. A gallon of gasoline

GEORGE: I just looked…I just passed a pump today, it’s 2 dollars and a nickel where I am.

IKE: Do you know how much it costs to send a certified letter? $2.85.

GEORGE: So the oil companies are still beating them, aren’t they?

IKE: Yes.

GEORGE: See, this is an example of it stays the same, nothing changes. The oil company is still doing a better job than the US government.

JIM: But if you turn on the media and you listen to the media or read The Washington Post, or New York Times, the government needs to get more involved in the energy business.

GEORGE: Well, of course they do. I mean we can see the logic in that from just our past 3 minutes of conversation, can’t we.

JIM: Oh, goodness George. I wish we had another hour of time to carry this conversation further because you had a lot of wisdom and you’ve been around. You’ve seen these markets, you’ve seen these things from a fundamental side – an experienced side. In our remaining time, tell our listeners what it is that you do and how they can learn more of what it is that you do.

GEORGE: Well, I wrote a book a few years ago. Ike was so kind to mention it on his show, and because of his show, I started an advisory service where I have email letters that go about to folks – they can subscribe to it. My phone number is posted on Ike's website, they can get it from there. Or if you would like I would be happy to give it to you now: (956) 765-3595. I answer that line myself, just like it says on the book. ZapataGeorge.org. The phone number and the mailing address are on the website. I appear on the premier radio network which is a 20 station hook up. I occasionally appear on report on business in Canada, that’s a nationwide TV hookup. I’m on Ike’s show as a regular. And I run a hedge fund which we can’t mention the name of according to the SEC, however hedgeco.net, under the global macro section, we were the number one performer so far this year, and the number 4 performer in the final quarter of last year. So all of these things I talk about that I’ve talked about today I put into action, and I actually have a track record. I’m proud of it. [55:52]

JIM: Talk about your book too.

GEORGE: Oh, I wrote a book. It’s a little bitty book and I kept it short and sweet because I wanted Joe SixPack to roll it up and stick it in his hip pocket, and read it on his way to work or while he was waiting for the cement to dry or something. But unfortunately he didn’t do that, and the main theme of the book was at that time, the book came out December 1999, I said this is the end of the road, you know, get off the train, and of course what I wanted folks to do, was mainly was get out of the mutual funds, because I mean where else in the world, now that I’m a fund manager I shouldn’t say this, where else in the world do you pay to get in, you pay while you’re there, you pay to get out, and then you pay a capital gain on gains you didn’t receive. But anyhoo, the book came out with oil at 8 to 12 dollars, and I said at that time over the next 3 to 8 years you will not believe the multiplier that will happen to this commodity. Well, those were fateful words, my friends. [56:59]

JIM: Well, George if you write another sequel and get another important revelation, and I want you to know you can pick up the phone and we’ll get you on the air.

GEORGE: Well, hey it’s been fun to be with all of you. I’ve enjoyed the dickens out of this.

JIM: Well, so have both Ike and I, and George we want to thank you for joining us on our first program of Ahead of the Trends in this new year. I want to wish you a very prosperous new year.  And hopefully, you’ll come back and talk to us again.

GEORGE: Hey, it’ll be my pleasure.

IKE: Thank you, George.

GEORGE: Thank you, Sir.

JIM: Well, I know Ike before we had George on the air you said he’s very colorful. And boy! Indeed that interview was, but you know for 70 years old you can just tell there’s a lot of experience and wisdom that was coming out there. And you know we’ve got to have this guy back.

IKE: We will. And I’m telling you, when, in the summer of 2000, George went ahead and on TV, he said to short Juniper, and JDS Uniphase, and a bunch of other stocks like that, that was trading in at you know stratospheric prices. You don’t know how many calls we got telling us to never have this guy again. Because he didn’t know what he was talking about. And of course just six months later those stocks were trading below 20 bucks.

JIM: Absolutely amazing. Well, listen, this has been a great way to start out the year, it’s nice to get somebody with a lot of wisdom, and talk about a background, it’s just incredible. So, on behalf of Ike Iossif and myself, we’d like to thank you for joining us on our first program of Ahead of the Trends.

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