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The
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Part 1 JOHN: Nice smooth intro to the program right there. That’s the music of Scott Peterson who is an FSN listener. His website by the way is myspace.com/Scotto2008. Some day the party is going to end, Jim. I just don't want to be there when it does. I want to be on my own island, printing my own money… JIM: …Grow my own trees so I can supply the press. JOHN: Well, here we are Dying of Money, Part III. Third week we've been thumping this theme. You're beginning to see the death of the United States dollar. It will take a while to do that. There is sort of a process that goes on. This week we are going to describe the consequences of inflation; or in reality, if you see this in an inverse relationship, money losing its value. The one thing I always have to tell people, Jim, when we begin in talking about this, I always remind them, “remember, it's not that commodities cost more. It's that the dollar is worth less.” That's always important to keep in mind. JIM: One thing that we've always been talking on this show is that when money is created it has two places that it can go. It can go into real goods and that’s reflected in higher prices in our economy, or it can go into assets. Now, if you think about this, John, from on individual point of view, when a man has money in his hands, he has, let's say, two principal things he can spend it on. One kind of thing is recorded in GDP or the national product and it consists of spending on goods and services that make up our economy. The other kind of thing he can put his money in is things that consist of assets. And that would include for example: property, paper property such as stocks, bonds, mortgages or commercial paper. Now, it's this second category that lies entirely outside of the national product and corresponds directly to national wealth. JOHN: And what you're talking about here then is asset inflation, or what I guess Jens. O. Parsson refers to as the good kind of inflation. JIM: Sure. Because when wealth is increasing or we have the illusion that wealth is increasing – whether it's the value of our home or, let's say, the stock market, we think that we're getting wealthier. And the problem is paper printing of money or money creation doesn't create wealth. It's only when you save and invest and create productive things in the economy that real wealth is created. But nonetheless money printing gives us the illusion that we are getting wealthier. And what we need to understand is that at any given time some part of the total money supply is employed in the national product transactions that we call GDP, and another part is employed in capital transactions. There are at all times two distinct money supplies and two distinct velocities that are operating on money: One in each market for the economy, and one that operates directly in the market. And what this translates into, in effect, is the aggregate price level in each market must be higher as the quantity or velocity of money in that money rises in relation to the supply of values in that market. [5:14] JOHN: So in essence and one factor that you stressed over and over for the last two years that keeps you bullish on the markets is that the use of money in capital markets is a principal repository of inflationary potential. JIM: Exactly. Monetary inflation invariably makes itself felt first in the capital markets and most conspicuously as the stock market boom. Hence, as we look today what have we seen? Huge liquidity injections into the markets by central banks and, voilà, we're looking at Dow 14,000. And if we get anymore rate cuts and we see more liquidity injections (which I expect that to take place going forward), we're going to see Dow 15,000. [5:58] JOHN: Well, people just don't see it that way, Jim. They just think it's rising asset prices in a bull market, say, for example, instead of another manifestation of inflation. So you have two different view points of the same phenomenon. JIM: Sure. And that's because once again rising assets – whether it's real estate, stocks, bond or commodities – is the good kind of inflation. And it’s only when it carries over into the economy that everybody becomes fixated and you see all kinds of cries to stop either wage inflation or put in wage and price controls. But you know, as long as a good portion of that is channeled into the financial markets, then you get wealth inflation and that's the good kind of inflation that everybody loves. Nobody complains about it. And this is something to think about – every monetary expansion in the US since World War II has been followed by a stock market rise. And conversely, every cessation of monetary expansion leads to a stock market fall. So every bull market was preceded and accompanied by money inflation. And that's the thing I think people don't see. Bull markets rest on nothing more but inflationary expansion. [7:11] JOHN: And so the missing factor in financial reporting to the masses that we hear on a daily basis is that rising prices are really just another aspect of inflation. Not the inflation itself. JIM: Sure. Exactly. And as money is created it flows into the capital markets. This forces up prices of real values such as we're seeing today in the stock market. This drives up prices. And this in turn is one form of simple price inflation. But as you just mentioned, John, nobody thinks of these price rises as inflation. They are saying, “wow, the stock market is up,” or “my home is going up in value.” But when you really boil it down, one man's price inflation is another man's capital gain, even if the first man doesn't mind it if he's getting some of the capital gain for himself as well. [8:01] JOHN: So basically when we talk about Dow 14,000, everybody is exuberant saying this is a record high, this is tremendous, but in reality it is reflecting the consequence of all this monetary expansion. And say if we were to reflect the value of the Dow in dollars from 30 years ago, we'd probably see a decline rather than an increase? JIM: Or if you were to look at the Dow in terms of gold it's actually been going down, or if you were to look at Dow in terms of euros or other currencies. And here is a good point of this. You remember we were talking about a capital market crisis, it was the third pillar that would have to fall in place before the Fed would begin cutting interest rates. And when they did, as they did in August when you saw central banks inject hundreds of billions of dollars into the banking system, the first response was a meteoric rise in the stock markets around the globe. It's another reason why stock markets didn't contract during the last Fed rate hike cycle, because the Fed kept injecting money into the banking system. So even though we had rising interest rates, we also had rising asset prices. [9:13] JOHN: So when the financial guys and the government officials talk about the nation as getting wealthier referring to, for example, when housing prices were going up, or that stock markets are levitating – that’s the term we hear – this is really just a chimera. It's not true. They are just being bloated up there by, well, I call it funny money. JIM: Sure. JOHN: You know, something you might want to do here, Jim, is to repeat that Jens O. Parsson’s quote about the different stages of inflation because let's face it when inflation goes up and people begin to see their house prices go up and everyone goes, “wow, it's going up and up and up” (I heard that from members of my own family, you know my extended family, it's going up and up and up, the sky is the limit), no one ever thinks it's coming back down again. But then at a certain point some sort of pain begins to creep in. JIM: And that's very important, because we are seeing some of that pain creep in right now with higher prices for food, higher prices for energy, higher prices for service. It’s not reflected in the Consumer Price Index because everybody is distracted by the core inflation. But that's why I think that quote from Parsson’s really in a nutshell just laid out the path of inflation in terms of where we are heading. Now, I want to read that once again because the show has doubled in size, we've got a lot of new listeners today; and I want to come back to it again because we're seeing some of this right now. And it goes like this: Everybody loves an early inflation, the effects at the beginning of an inflation are all good. There are steepened money expansion [which is what we're seeing right now with double digit money supply growth around the globe] rising government spending, increased spending, budget deficits, booming stock markets [exactly what we're seeing right now] and a spectacular general prosperity all in the midst of temporary stable prices. Everyone benefits and no one pays. That is the early part of the cycle. In the latter inflation on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits and still roaring money expansion now accompanied by soaring prices and the ineffectiveness of all traditional remedies. Everyone pays, no one benefits and that is the full cycle of every inflation. And the one thing I might point out here in the latter effects of inflation what happens, you could even see the money supply contract. What happens is velocity increases; as the demand for money falls everybody wants to get rid of it. And so even though the money supply may not be growing as fast as the currency is depreciating, the reason the currency is depreciating at a much faster rate is demand for money has dropped. No one wants to own it. So as soon as they get it, they get rid of it. And you're seeing some of that today with the recycling of petrodollars: a lot of commodities, oil worldwide is priced in dollars but as soon as they get these dollars they want to get rid of them. It's one of the reasons why the dollar has been faltering even though the money supply and central bank monetary expansion has been growing. [12:40] JOHN: Let me ask you a question too as we do this. It would seem that as the value of your assets goes up, if you can cash out on these assets, convert them to dollars and then put them into something else that will retain value, then you could increase your wealth. It's a game. It's like a roller coaster. You have to get out of the funny money before it starts on the downward swing again, isn't that right? I mean would that work? JIM: Sure. Absolutely. And that's why we have been preaching – gosh, how long have we been doing this? five or six years? – get your money in real assets; buy gold, buy silver, buy gold stocks, precious metal stocks, buy energy, buy commodities. John, how long have we be telling that story? Five or six years? [13:18] JOHN: Yeah. Something like that. Let’s face it, as we said last week, all of the currencies of the world are in the process of some kind of death. They are all sinking boats on an ocean. It's just a question of how far down they are. The financial guys and the government officials, their job is to sort of keep the people fooled that the value of the money is really deteriorating as they hold those dollars, they have to keep the game going as long as possible. JIM: Sure, and that's why they are playing with the inflation numbers, they are playing with the economic numbers, that's why we'll get into the management of inflationary expectations and the ludicrous concept of core inflation which is just nonsensical. It’s not applicable to anybody in the real world. But you're right, they have to keep them fooled. The problem is when you take a look at this wealth that is created through paper asset inflation, the real wealth of a nation is not increased because paper wealth is increasing. It's just another form of inflation. A large paper wealth superstructure as we now have in the US provides an outlet for all of this expanding money supply and it takes place in buying, selling and reinvesting paper assets, fully as well as the supply of real assets. What really takes place here, the mobilization of monetary inflation with an expansion of paper wealth may proceed to almost any extreme so as long as paper wealth retains its credibility. And this gets back to the point that you're talking about, that's why they have to keep people fooled. So as long as people do not doubt the paper wealth, all is well. However, if people wake up and start to doubt the paper wealth that they own and decide to desert it, you have a problem. That's when the demand for money falls and that's when you really get hyperinflation. When that happens, money wealth is repudiated and the total supply of salable real values drops by the amount of money wealth, and the prices of real values must rise correspondingly. [15:29] JOHN: So the job of the authorities as I said is basically to keep people fooled that the value of money is basically dying. It's losing value. JIM: That's why you see so often Wall Street and Washington invent such nonsense as the core rate because it distracts people. They can say well, “the inflation numbers are up and we can't control food and energy.” And by the way, that's why they keep tinkering with the CPI. They are a hedonically adjusting it, they are using substitution effects. They are using geometric weighting which means when something is rising it gets less weight versus something that isn't rising. And it's also why the Fed monitors very closely inflationary expectations because what they are really trying to say is inflationary expectations is their way of keeping them fooled. I call it the “keep them fooled” Index. So as long as inflation expectation dollars remain low, they can keep inflating. So in fact, let's go to that Bernanke cut on inflationary expectations and you'll see what I mean by this. BERNANKE: In the long term, low inflation promotes growth, efficiency and stability, which all else being equal support maximum sustainable employment – the other leg of the mandate given to the Federal Reserve by the US Congress. Admittedly, measuring the long term relationship between growth or productivity and inflation is difficult. For example, it may be that low inflation has accompanied good economic performance in part because countries that maintain low inflation tend to pursue other sound economic policies as well. Still, I think we can agree that at a minimum the opposite proposition that inflationary policies promote employment growth in the long run has been entirely discredited. And indeed, the policies based on that proposition have led to very bad outcomes in every case in which they've been applied. Undoubtedly, the state of inflation expectations greatly influences actual inflation, and thus the central banks ability to achieve price stability. But what do we mean precisely by the state of inflation expectations? How should we measure inflation expectations and how should we use that information for forecasting and controlling inflation? [17:38] JOHN: And despite how much people may try to assure you that everything is A-OK, number one, the public does begin to catch on sooner or later, which creates a lack of competence in the government and everything ultimately comes screeching to an end. It just has to at some point or another. JIM: You're absolutely right, John. The economic philosophy that governments follow is John Maynard Keynes’ Keynesian philosophy which had its genesis in his book General Theory. He made that famous quip where he said: In the long run we're all dead. And he was essentially admitting that price inflation follows monetary inflation but not right away. It kind of sneaks up on you, but when it does, there is hell to pay, and that's what he said, in the long run we're all dead. [18:25] JOHN: This is pretty much what's driving everything, but you know, if you look at, wouldn't you say that Keynes was the ultimate, what do you call it, monetarist. JIM: Sure. I mean, if you look at the General Theory he had four principles to stimulate the economy. One was the state must intervene because you couldn't trust the free markets. Boy, how often do we see this? Just take a look at what government wants to do with this mortgage mess. The second thing is the body economic must be forced to consume more, thereby spending itself rich and not try to save – and take a look at the country today. Our saving rates are negative. We don't save anymore. The emphasis is on consumption: You must consume more and that's what creates prosperity. And the corollary to that is consumption is stimulated by jobs, jobs by new capital investment and investment by the state creating artificially low interest rates on capital rather than high rates as we would see under Austrian or classical economic models. And finally, where necessary the state should deliberately spend more than it taxes in order to stimulate investment and business activity and consumption. So you're right. If you take all of his propositions, they amount to nothing more than a prescription of simple monetary inflation. Keynes was a monetarist at heart. And this is the thing that I think all governments have discovered, monetary inflation has a marvelous stimulative short term effect. That's the good inflation that Jens O. Parsson talks about, because when they inflate immediately the economy does better. It expands, assets go up. And so here we are today in the 21st century, governments have been rediscovering this delight throughout the ages by instinct. But I guess maybe what we could say about Keynes is he clothed it in an aura that made it seem wonderfully new and magical. But going back to Roman emperors when they were cutting coins or inflating the money supply, this is nothing new. It's been with us for over 5000 years. [20:31] JOHN: But Keynes always put off the day of reckoning meaning we're not going to be the generation to see that. His generation, they wouldn't see that. He knew there would come a day of reckoning. It's really sort of selfish when you think about it. I mean there's a moral issue, we talk about moral hazard here and moral hazard is you’ve destroyed the wealth of many people especially the middle class. JIM: Sure. JOHN: But in the meantime we're sort of enjoying this bout of monetary inflation. We're seeing it in rising stock prices. Now, that's assuming a closed system too. Assume that the United States had these brick walls up around its borders, that nobody could get the money in or out; but now we have the issue of foreign central banks due to the foreign investments, oil transactions etc, holding the dollar. What happens to this whole little scheme if the foreign banks dump the dollar? JIM: Well, if you take a look at the monetary system the way it works right now, it's not in their interest to do so. What we're going to see is a series of competitive devaluations. You know, John, even the main analysts on Wall Street are starting to figure it out. John Hill and Graham Wark, analysts at Citigroup, talked about: Central banks have been forced to choose between a global recession or sacrificing the control of gold. And they have chosen the perceived lesser of two evils. We believe the policy resolution to the new credit crunch will take the form of a massive extended reflationary rescue i.e. money printing by all of the central banks – and a new cycle of credit creation and competitive currency devaluation. See, if the other currencies were backed by gold as like in the Twenties when Germany inflated the pound, the dollar was backed by gold. So there were real asset alternatives. Not today. The only alternative to paper wealth is gold and bullion. And even Citigroup is saying that this reflationary effort could take gold to $1000 an ounce or higher. They went on to say that: The game was up once the Federal Reserve slashed rates at half a point and opened the liquidity flood gates. We are now witnessing a run on the world's paramount reserve currency – an event that occurs twice a century or so and never with a benign outcome. But as we have cut our interest rates driving the dollar down, that is the corresponding reaction to lower interest rates. Here was a comment made by the President of France. And I quote here: When the American federal bank lowers its rates everything gets back on track. When we don't lower ours, we dig ourselves in deeper. There is a small problem there. Europe will not let America export its day of reckoning to the rest of the world. We will counter with our own devaluation. And that's what you're going to see is competitive devaluations, you'll see it in Canada, you're going to see it in Europe, you're going to see it in Asia. And so when all currencies are losing their value at the same time it's probably less noticeable other than the fact that maybe one currency drops faster than the other because they are inflating faster. But it's a competitive currency devaluation, and it's another version of the 21st century version of trade wars. And that's what the rise in gold is telling us, John, and it's why gold is the ultimate currency. And that’s what we've been preaching here for almost five or six years now: Buy gold, buy silver. Five years ago, in 2001 or six years ago gold was at 255. Silver was at $4. Today, gold is at over 740, silver is at $13.40; the XAU, which used to be at a low of 49 is at 171; the HUI which was at a low of let's say 60 is now at 393. And so here you've seen almost five and six-fold increases in gold stocks; you've seen a more than doubling almost tripling, almost three-fold increase in gold; you've seen almost two and a half to three fold increase in silver. And yet, John, people still don't get it. Maybe they are going to chase a stock, but they don't understand what's happening to their money. [24:46] JOHN: So basically in response to global monetary reflation as you talked about last week, say, we're going to see the prices of real goods such as commodities literally rocket upwards. That's just the response to it. JIM: Sure. I believe you're going to see probably in the next 12 to 15 months the price of gold is going north of a $1000, perhaps between as high as 1200 and 1500 before we'll get a correction. Oil is going to go to a hundred dollars a barrel. Now, here is one – get ready for this one and I can imagine what my emails are going to be this weekend! – if the Fed cuts in October and December, and I want to preface that If they cut in October and they cut in December, we could hit 15,000 in the Dow by the end of the year. And next year as they continue their cutting cycle, we could see the Dow at 18,000. [25:37] JOHN: 18,000? No bull? Or I mean bull! JIM: That's a big bull, John. JOHN: Okay. Is this really a realistic number. And I guess if it does, we are going to hear all of these proclamations about -- see, the economy is doing great, it's recovered, can't you see, you'll hear the hysterical euphoria the day it does. I can see it coming now. JIM: Yeah. If I can boil down my philosophy is: I'm an inflation bull. JOHN: How realistic is that, anyway? JIM: Take a look at where we're at today. We've got M3 growth that is approaching 15%. But more importantly, we now have two political factors that are working in investors’ favor. And never under estimate the power of politicians, John. One is we're in a presidential election cycle. And every presidential election cycle, the third and fourth year – especially the fourth year – have been good for the stock market. And the second political factor that we have going for us is we're now entering a Fed rate cutting cycle. So add politics, through a presidential election cycle, and Fed rate cuts, voilà, that equals higher stock prices. [26:41] JOHN: I guess at this stage I'd have to ask two questions: Number one, how well have these two factors worked in the past and given some kind of a track record there, how reliable do you think they are going to be as a predictor of the future? JIM: Well, if you take a look at the past half a century, in terms of political elections, my friend Brian Pretti just wrote a piece on this. And what he did was take the price performance of the Dow industrial: And rather than read every single presidential cycle, in the third year of a presidential cycle, the average increase in the market was 11%. And as we look at this year, what do we have in the Dow, it's up, what, 12, almost 13%. It gets even better in the fourth year, because remember you get down to the home stretch just before the election. The average appreciation in the fourth year of a presidential election cycle, John, is double digits. The average is 19.8%. [27:46] JOHN: Well, okay. The second factor rate cuts, what about them? JIM: Well, after the second rate cut, remember we just got the first one in September with a half a point. There was only twice that it really didn't work. One was in 2001 where three months, six months, nine months and 12 months after the rate cuts, the markets were still down. Another time where it didn't work as well is remember in the first two quarter of 1981, or the last two quarters 1981, when the markets were actually down but almost every single rate cutting cycle, the stock market was higher, three months, six months, nine months and 12 months after the second rate cut – and I'm talking about double digits, John. And you can go all of the way back to 1971, the market was up 18% 12 months after the second rate cut; 1975, it was up 38% 12 months later; 1980 up 16%. After December 81 year it was up 18%. After December 84 up 16%; 18% after 1989; 27% after 1995; 21% after 1998. And the only one time it was really negative which was the year 2001 when we saw the events of 9/11, and also we were coming off one of the most spectacular rises in stock prices with the NASDAQ bubble. [29:16]
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JOHN: I always like the military expression “thrive in chaos” which means when everything is going a little loony around you and you're not quite sure which way to make things go, then you have to learn how to thrive in a chaotic situation. To every life some little rain will fall but more often sometimes rogue waves and other nonlinear events – day-to-day we go through linearities in our life and all of a sudden there is a nonlinearity. So what are the probabilities that something goes wrong? I guess even in investment life. And what are the probabilities then that two or more things go wrong at the same time? JIM: You know, John, if you take a look at all of the things that have happened in the financial markets going back over the last two decades, the one thing that I think is fairly safe to say is these nonlinear events happen much more frequently than we would acknowledge. And that's the real problem is that a lot of this stuff that we see today, you know, everybody is putting together these models, the bell shaped curves and saying, “you know, what, most of the time this is what you can expect.” Well, guess what? Most of the time we get these things that just sort of come at us out of the blue and just change everything overnight. Just take a look at what's happening in the financial markets in the month of August. The Fed had a FMOC meeting. They said no, tough, we're worried about inflation; and a week later they are cutting the discount rate in an emergency by half a point. Everybody was then thinking, okay, they are going to hang tough and they were talking tough, only a quarter of a rate cut point. And all of a sudden they cut rates half a point. Things change and they change more frequently. I mean just look at the kind of technological changes we're having. We're developing information and technology at a much more breathtaking pace and all of that is impacting the markets. And I think our paradigms, our institutions aren't playing catch up with the pace of technological change, much less sociological changes that's occurring in the world at any one time. [33:50] JOHN: Well, you know, Jim, you really are hanging over the bow here, so to speak, you're dangling over the edge with your predictions of higher stock prices. But as long as I've known you, you have to admit you follow your own instincts which are usually opposite of the crowd or the herd as we call it on the street. But aren't you worried that this real estate that you've written about back in 2005, Day After Tomorrow, really becomes something worse we keep on sliding down? JIM: Well, sure. There could be a lot of mishaps. The Fed could not cut rates aggressively, although they demonstrated that I don't think that's going to be the case. There is always something, John, that's unseen out there that we just can't see that comes out of nowhere that changes the world. One of the things I do to relax at the end of the evening when I'm tired of reading, I watch documentaries. And the latest documentary I'm watching a three part series on World War I. And it was amazing. All of the crown heads, the kings, the czars were at their summer palaces and vacationing – as Europe does normally during the month of August. And then we had two shocks: the Arch Duke and his wife were assassinated and it made the front line papers an everybody said, “Oh, okay, that wasn't too cool,” and nobody thought anything of it. The vacations still continued. King George was on vacation reviewing the British fleet as he always does during the summer. The Czar was at his summer palace. And yet the Austrians decided at that point, you know what, we're going to punish the Serbs and they began to move aggressively. They began to mobilize. Once they began to mobilize the Germans began to mobilize and then all of a sudden out of nothing when everything seems to be going smooth the next thing we knew was that we had a full scale world war. So yeah there is always something that can show up out of the blue that can change. We can have another 9/11. [35:44] JOHN: Ironically, these events as you say are really not expected either. They are not where everybody seems to be looking at any given moment. How much of this though rotates around probabilities, you know, you're looking at probabilities that something can go wrong but obviously these probabilities come up often enough throughout history that they are almost cyclical but on a random type of basis. JIM: Well, statistically speaking the odds are low but given what we've seen over the last couple of decades or, heck, this decade it doesn't mean much. Our whole financial industry, John, has grown-up on modern portfolio theories of risk control. All of the models are based on that bell shaped curve that everybody has seen in their finance course or statistics course where most probabilities of risk can be contained within one or two standard deviations. One standard deviation contains 68% probability of all outcomes, and two standard deviations contain probabilities of 95% of all outcomes. So the problem is everyone on the street today including hedge funds, use these risk models based on this bell shaped curve. The problem, as you have made reference to, is we live in a nonlinear world. There are more extreme events than we are led to believe. [37:07] JIM: Yeah. Statistically, I guess, you could call these events rare, but then they do occur on a fairly regular basis throughout history. You have to look at the S&L crisis, the peso crisis back in 1994. There was Asia in 97; Long Term Capital Management and Russia, the next year that was 1998; NASDAQ 2001 and now we've gone through a credit crisis in 2007. And so what are considered to be rare events (or let's look at it this way: nonlinearities) really do occur with a certain frequency out there. more so than a lot of the straight models would suggest. JIM: Well, you know, if you look at this from the perspective of statistics, John, these models or risk models out there tell us that we should see a one standard deviation event about every six years; and a two standard deviation about every 44 years; and something like a third standard deviation I think it's over 700 years; and four standard deviations we never see in a millennium. I mean it's like over 31,000 years. And yet in reality, these returns that everybody talks about in the market and these nonlinear events aren't really normally distributed as they are portrayed in this bell shaped curve. We really don't have these normal distribution type cycles that everybody talks about. What we have is something that's sort of an uncertain power curve that really doesn't have any meaningful average. I mean you can say, what's the probability that we will have another 9/11 or what will be the probability we will have another Asian crisis or Long Term Capital Management crisis? I mean heck, last summer, summer of 2006, we had a hedge fund blowup over natural gas prices and nobody even blinked. So there isn't a finite or a definite standard deviation upon which to base, I guess, these confidence levels that all of these risk models are based on. And that's why we have talk about this so many time on the program: We're really kind of operating in brave new territory right here is because a lot of this stuff is seeming to happen much more frequently. It's a combination of technology, it's an issue with information today. I mean it used to be that you take a look at in the 19th century when Wellington won at Waterloo the Rothchilds were able to capitalize on that by carrier pigeons. But news traveled much slower. Today news happens in five, 10 seconds later it's on somebody's blog and it's all over the internet. It's one of the difficulties, I think, a lot of the media networks are having today is they are becoming less relevant in terms of news. News is on the internet much faster. Something happens in the morning, most people have already read about it, analyzed it, dissected it long before the evening news broadcast comes along or long before tomorrow's paper comes along. I think that's one reason why the afternoon papers are just dying off and as the whole newspaper industry is. [40:24] JOHN: Yeah. And when you consider that these graphs first of all operate on the assumption that the past predicts the future –that's one assumption – (and depending on how you graph in the cycles everything is based on a time paradigm that goes through there) so if things are accelerating and becoming more rapid then that alone is going to start throwing some of these models off. And this is what we were talking about last week when you said to throw out the old models – the old paradigms, everything you've been taught in school – because we're operating in what's becoming a much different world today where change is more rapid. And this is going to be make much more difficulty for investors to keep themselves on track. The worse thing you can ever do is be looking at the wrong model from the past and keep trying to work it in the future. You know, when the horse is dead, remember to dismount, especially before it collects flies. All right? JIM: You're absolutely right. If you take a look at the 80s and 90s, the main players in the markets at that time were the pension funds, the mutual funds, the insurance companies. These were the institutions that held the largest chunk of the world's financial assets. Now if you we just take a look at this decade, we have a whole new group of players who are exerting an increasing influence on the markets. They are everything from Asian central banks, how much have you heard about all of this liquidity that's coming from Asia or their savings? Look at the number of hedge funds and the role that hedge funds play today. We've seen private equity. Not to mention something that goes back to the 70s, which is petrodollars. You're talking about 80 something almost 84, 85 million barrels a day that's sold in the oil markets; and oil is at close to 80 dollars a barrel. You're talking about an awful lot of money that's going into these exporting OPEC countries. And those dollars, because oil and most commodities are denominated in dollars, means a lot of recycling that's coming into the market. So you've got four new players that's coming in. In fact, there was an interesting story on Bloomberg Thursday where they got some transcripts that they got a hold of from the Freedom Of Information Act where the last Fed meeting – not the September meeting but the meeting in August – when the Fed said, “no, we're not lowering interest rates we're hanging tough.” There was a series of phone calls and meetings that Bernanke had where he was talking with Wall Street officials and some of the biggest hedge funds like Bridgewater, Ray Dalio and Ranieri of Hyperion were called in to talk to the Fed. “Hey, what do you think?” Bernanke was talking to Robert Rubin of Citigroup – one of the largest financial institutions in the world – not to mention the typical central bankers around the world. The fact that he was talking to large hedge funds just goes to show you how the world has changed and the impact of their influence on the financial markets. Basically as we said last week, our brave new world, throw out the new models, the old paradigms; Things are changing and they are changing as we speak. [43:28] JOHN: And thus the case for our brave new world which suggests that there are new paradigms in play here, and you've got to throw out the old ones if you're going to stay par with what is going on in the new ones. JIM: Well, joining me on Other Voices this week is good old friend Bill Murphy. Bill, what do you want to discuss besides manipulation!? BILL MURPHY: Well, probably most important thing to me would be the action of the past two days. I've never seen in 10 years, you know being in the tank twice and closing higher. It's just remarkable. Despite the incredible action there’s almost no interest in the gold market. [44:44] JIM: You know it's absolutely amazing, Bill, as I look at the holdings of some of the large gold stocks or even the juniors and then I take a look at the money supply figures globally we're inflating. I don't think we're going to have trees left at the rate they are inflating. And yet you look at some of these juniors have just been pounded. You're talking about companies that are selling at 20, $30 gold in the ground at a time gold prices are over $700 an ounce. Isn't that amazing? BILL: It's absolutely extraordinary and it's so bullish. I've never seen anything like it. My site’s just mediocre. You know I’ve been right for six years and the more it goes up the less people are interested. It's the craziest thing I've ever seen in my life. JIM: Any time the Fed inflates or they cut interest rates, you know, you've got Cramer jumping up and down. People are more focused I think on buying RIM or Google than they are… people are saying, “God, look what happened to Google.” But I mean take a look at what's happened at gold stocks in the last five or six years! I mean that's incredible. And yet people aren't interested as you say. BILL: Nope. I think that without a doubt the Dow making highs has taken away from it. And it's the damnedest thing but it's so bullish for what's happening. We’ve been right since 2001 where you know, gold is just I think it's already traded above 700 something like three or four times the amount it did in 1980. Again the action that’s passed today is the most extraordinary thing I've seen in 10 years. [46:09] JIM: Isn't that the way it always is though? I think of the equity bull market that began in 1982 and institutions caught on in 85 to 87, and then the public came in in 1995 where you had almost what was it, 85 or 90% of the money in mutual funds came in from 1995 to 2000. So the public was out of the market for the first 12, 15 years of the bull market. And Bill, what do you think it's going to be? Do you think when we take out the old record of 850 and gold goes, I think it has to go triple digits before the guy in the street finally wakes up and notices. BILL: If you had told me years ago, I would have said 500 – when it was above $500 gold would do it. Dead wrong. 600, 700 nothing, now I think 800 probably nothing. Maybe a new high or a thousand – Yes. [47:00] JIM: I think the next hurdle which is going to be 850 when we take out the 1980 highs. But you know what, the Dow could be at 15,000 in nominal terms and Google could be at maybe 650 and so they’ll be talking about Google. BILL: It could be, you know, but since I'm looking for 3 to $5,000 gold, I think I know what's coming and why. You know, it's just time to be patient, to scratch your head and it doesn't make me happy, but I'm not going to let it get to me. JIM: You know, you have a saying that I really admire but is really very appropriate for this gold market: You've got to be in it to win it. BILL: Yep. JIM: And the thing that I want to point people's attention to: If we went back to, let's say, August 16th, when the XAU was at, like, roughly 125, here we are six weeks later and it's at 171. And when gold moves, it doesn't go up a couple of points. I mean it moves, and it moves like a rocket ship. And unless you're in it, you know, you miss the majority of the move. BILL: Exactly. I think we've got the move coming next week to be very specific – an explosive move next week. And at once these shares will change and then the little ones will double in a week. It won't be the old crowd that makes the money. It will be the new momentum crowd that just jumps all over it. But the old guys will be waiting to buy in when they sold it. You know that drill. JIM: Sure. BILL: And it just gets away from them and next thing the dollar stock will be two and they'll say, “geez, I can't pay two.” And then it goes to three eventually, and four and five and then they'll miss it. JIM: They'll say when it's at 4, I'm waiting for a pull back and then it goes to eight. BILL: It's what’s coming. It's going to go nuts because once the general public finds out what's going on and why, the market cap in this tiny sector won't be able to handle it. JIM: That's the thing that I think investors may not realize. If you take a look at gold production of what? 2500 tons a year, you take a look at silver production and then you take a look at the market cap of all of the gold stocks, I mean it's a drop in the bucket. I don't think it all adds up to the market value of Microsoft. BILL: Probably not. What's coming is extremely exciting. At the moment, it's just aggravating. I mean in the terms of the shares, in terms of gold it's exciting as all get out. [49:05] JIM: Do you think they are losing control and have just decided, “look, we've got bigger problems. And if gold rises, well, we'll just have to live with it.” But central bankers as they inflate, as we have double digit money supply growth around the globe today, how is that going to look? I mean I can just see this. You turn on the morning television, CNBC is talking about: “The headline inflation numbers around 8 to 10% but the core rate is 0.2% and gold is over a thousand.” Aren’t they going to have a hard time explaining that? BILL: They create their own monster because if they just had let gold go and be like another commodity, it wouldn't be any big deal. But because they suppressed it so long and because they've made it the crisis barometer, the inflation barometer that everyone talks about, now you're right, when it goes now, when it takes off, everyone is going to say well, there is only one explanation. There is too much inflation or there’s a big crisis, or It's bad. It's bad for Wall Street. Again, they made it, they’ve created their own monster. Now when it goes, that's what people are going to say. And they should have let it go years ago and they wouldn't have that problem. [50:09] JIM: It's amazing too because at this time how many analysts do you know at major brokerage houses are covering the gold sector or precious metals? Very few I can think of. BILL: Very few. I call it the worse reported on market in history. JIM: It's amazing when you turn on the cable channels in the morning they'll have flashing “Dow at new record.” And yet when gold is at a new record, you don't see that flashing all over the screen. Maybe it's the fifth or sixth print as they go through the screen. BILL: By the way, on that manipulation, I don’t know if you saw it, but this past week Citigroup, Citibank, came out and basically their gold guys that the central banks have been managing the gold price. He didn’t mention GATA, but in essence he endorsed everything we had to say. He said they are losing control. [50:53] JIM: When the guys at Citigroup are recognizing they are losing control, and I think the one thing that's very tough for them, you know, any time there is a central bank sale, any time gold is going up, they'll announce, “hey we're going to announce we're going to sell gold,” and you know, and I know, Bill, if let's say you had a large position of IBM stock and you had some good profits in it and you wanted to unload it, I don't think you would tell your subscribers or anybody you know, hey, I'm getting ready to dump my IBM in the next month or so. So I mean even their outright manipulation schemes just don't seem to work like they used to. BILL: Well, that's because they are running out which is what we said was going to happen years ago. And they are running out. Demand is probably a thousand times more than supply. And they can only can get it from certain places and they – and each year and month that goes by they have that much less. JIM: You have been talking about this. Not only about manipulation of the gold market and it was a real wake up call for me when you started writing about it because it is -- just all fit into place because I was looking at the demand for gold versus the supply and I go, “you know, something is wrong here. Why isn't the price going up?” I mean, if you had that kind of demand for oil versus the supply, you know, we'd be looking at $200 oil. BILL: That's right. JIM: And you've done some yeoman’s work in this area. And Bill, as we close, if our listeners would like to find out about some of the major pieces that you guys have written about, and get a firm grasp and understanding of the fundamentals of the gold market, why don't you give out your website, and a couple of the pieces that you would recommend our listeners read. BILL: Well, it's www.Lemetropolecafe.com. And the GATA site is www.gata.org. I put stuff up at the James Joyce table at my site and one thing they might want to read, I just had a speech at Silver Summit in Coeur D’Alene, Idaho and it really recaps a lot of things and shows how really GATA is going the mainstream route here. Our approach to the whole thing is to do what the establishment does: do conferences, writing letters to Congressmen, visiting Congress, you know, going to Washington. We've done all the things in the appropriate right way. And I think people will be surprised when they see what we've done and how we've done it and the kind of conferences we have and who attended and we're pretty proud of it actually. [53:15] JIM: To your credit, you were way out there in the early days where you know, the things that you were talking about people might have labeled as fringe but now as people realize what you were talking about, it has been right on the button. Like you said, you guys are mainstream. BILL: Yeah, just on the news the other day a fellow named John Brown, a former member of the British parliament said the gold price is managed. And if it hadn't been the price would be between 1000 and $2000 an ounce. So our stuff that was looked at as fringe years ago is now pretty much mainstream for anybody who has an open mind and is willing to look at the evidence and the facts and approach it that way. So and it's good to know, because the more people who realize what they’ve done it means they are going to realize the central banks only have half the gold they say they have and they don't have the ammunition to stop it and we're going to get an explosion. And based upon what we saw this past two days, I would expect fireworks next week. [54:06] JIM: Well, Bill, as we close I'm going to give out your website once again. It's www.Lemetropolecafe.com. Some of the best thinking on the gold markets there. And then another public service website it's www.gata.org. So if you really want to find out what's going on in the gold market, two great websites for you. Bill, as always it's a pleasure to have you on the program. Thanks for coming back and talking to us. BILL: It's my pleasure, Jim, any time. JOHN: Well, well, well, it seems like every time we get into a crisis, the doomsters come out of the wood works and it becomes -- we should use echo on this – A-A-Armageddon. You remember Harry Figgie's book Bankruptcy 95, and there wasn't a bankruptcy in 95 but we always managed to get through the crisis. The central bankers inflate, things keep going and that's until the next bubble bursts. But we seem to make through no matter what happens. JIM: You know the one thing that I think a lot of people around the globe do not give the US credit for is the US has probably the most efficient bubble creation machine in the world, John. We inflate and then we get this asset bubble. The asset bubble bursts, it deflates and then in the process we liquidate and we start the whole process over and over again. [0:58] JOHN: Why don't you give us an example of that. JIM: You know, one thing that we've been talking about on the program, I wrote about it in 2005, we were heading into a real estate crisis in December of last year. I wrote a piece called the Next Rogue Wave, the subprime credit problem; and then of course we talked about our forecast issue. But given all of that and what I was focusing on, all right, the Fed had been raising rates, they went on pause last summer and things were starting to slow down. We saw this capital market crisis coming up. All of these things were going to have to take place before the Fed would cut and we'd start a whole new cycle. And, you know, a lot of people are saying, “now it's going to get worse.” I still think we've got a ways to go. I don't think we're done with it yet. But you know, you've got to look at it in perspective today, John, compared to, let's say, what was even a bigger crisis was in 1991: the S&L crisis. And if you take a look at what happened at the savings and loans, we changed the laws, they got into other businesses, they expanded, they began to look for deposits around the country, they took the money in, they got into businesses, real estate, all kinds of things they shouldn't have gotten themselves into. We were in a booming real estate market at the end of the 80s, the Fed began a rate raising cycle, burst the bubble, we had an S&L crisis. And what happened in that crisis? A lot of savings and loans went under, the government created the Resolution Trust Corporation, they took over a lot of these failed S&Ls, took their assets – whether it was mortgages or real estate – turned around and just liquidated them in fire sales. And that's the thing that people have to understand about a real estate cycle versus let’s say a stock market cycle. A real estate cycle takes a longer time to play out because it's not like you can look in the Wall Street Journal every day and see the price of your house traded like you could a stock. And even though the crisis and the recession began in 91, John, I was buying a real estate in the 90s. We bought a luxury property in 94, even though the recession was in 91 and that was back when you could give the bank 60 cents on the dollar; and in 95 we bought an office building. And the same thing, bought it in liquidation. And you really didn't begin to see a recovery in real estate here, at least in Southern California, it might have been different elsewhere around the world until around 97, especially when the markets began to take off. People were making money in internet stocks and technology stocks, the market was going up 20% a year, and it began to filter into the real estate market. But the point being the S&L crisis that we experienced in 1991 as a percentage of defaults, losses, was much worse than what we're seeing today. But what we did is we inflated. Then we deflated as the price of real estate came down and then we liquidated, and we started a whole new cycle which was the stock market bubble that began in 95 as the Fed began to raise the money supply rates in November of 1994. [4:07] JOHN: So then what about the tech bubble because that was all the craze? Was that the result of this cycle or what? JIM: Well, sure. We were deflating one bubble, but we began – well, one bubble was deflating, which was the real estate bubble of the late 80s and early 90s, but the Fed began to engineer a new recovery, they called it a mid-cycle slow down. The Fed raised interest rates, actually doubled the federal funds rates in 1994. We had a big hiccup in the bond market especially in emerging market debt which kind of blew up. But, you know, beginning at the end of 1994 they began to inflate, and the result was for five years they just put the peddle to the metal and the result was we got a NASDAQ bubble and a stock market bubble – once again getting back to our Dying of Money theme, the stock market became the receptacle of excess money supply growth which found its way into the stock market. It created a stock market bubble. But what happened? We burst that bubble when the Fed began to raise rates in 1999 and 2000. But then in response to that deflating bubble, they slashed rates again and we got a real estate bubble. As the real estate bubble began to deflate, we got a private equity bubble and now they are going to reinflate again and we're going to get a stock market bubble. [5:29] JOHN: Okay, now, all things being equal this is at the cycle but then there is this tendency for Congress to jump in when things get politically incorrect and begin tugging and pulling on the levers, so how does that factor into this bubble cycle? JIM: Well, you know, in response to the stock market bubble and a lot of the mishaps and mischievous doings on Wall Street, we got Sarbanes-Oxley – this onerous legislation that came in as if you can legislate morality. It doesn't work. I mean I'm on the board of a mining company and John, you can't believe what we have to go through just to comply with stocks. I mean it's just a bureaucratic nightmare. And if you take a look at the number of bills coming out this week, you've got one bill that wants to expand temporarily Fannie and Freddie Mac by almost 150 billion so they can buy larger subprime loans beyond the $417,000 limit now. There is also another bill working where what they would do is in the case of a bankruptcy they allow the judge the ability to determine the value of the mortgage. Let's say you had a negative amortization loan that accrued $30,000 of interest to it. You know, the judge could just dismiss it. They could also leave it up to the courts for the judge to determine, you know, a reasonable interest rate or extend time periods. This is the kind of stuff that you have come in. Government creates the problem, and then what happens is they call for more government regulation, more government interference in the economy to correct it. And it just makes the matter even worse because the real problem is we keep inflating. [7:08] JOHN: Since that's what we're doing and we're now in another crisis, how are we going to get through this one? JIM: We're probably just about halfway through this housing market cycle. If you take a look at the downturns in real estate in the 70s and 80s, they normally lasted about four years. I talked about, for example, the real estate down cycle in the early 90s where the recession was in 1991, but you were buying distressed properties all of the way through 94 and 95. And also when you take a look at the downturns in the 80s and 90s, they averaged about five years. So we're probably not going to see this cycle bottom probably to sometime late 2008. Maybe. And depending on what happens, could even extend into 2009. So we've got more credit problems ahead of us and that's because we've got, what is it, $600 billion of adjustable rate mortgages that are going to reset from now until next summer, so we're not through this yet. But here is what's going to happen. And you're already starting to see this. In fact, this is a story that just came over as we're speaking on Bloomberg. “Home builders to liquidate assets in desperation sales.” DH Horton, the second biggest US home builder couldn't sell the one bedroom condominium in San Diego – and I remember seeing this in the papers last week. It listed for 349,800. The property was auctioned off as a last resort for 37% less. DH Horton, with an annual revenue of about 11 billion and Hovnania now face the worst choice and the worse residential real estate slump since the 1930s. They are selling homes at any price they can get. It's desperation time. And some companies may not make it. And you are going to see a couple of the big builders go under. But, John, that's exactly what we're going to do. We're very efficient in our bubble cycle. Once we go through that deflation cycle where the asset that was inflated begins to deflate, then what we do is we move quickly and we liquidate. And that's exactly what you're going to see. I was reading on the plane to Denver last week a BusinessWeek article about the number of vulture funds and private equity funds that are raising large amounts of capital. I'm talking about billions of dollars where they are going to go in, John, whether it's Phoenix, Miami or California and just begin to scoop up these properties for 40, 50% discount from sales value. And that's how you're going to end up solving this crisis is when you liquidate this excess inventory now estimated to be somewhere around 10 months and that's exactly what we did in 1991. That's exactly what we did in 2001. That's exactly what we're going to do in 2007 and 2008. We will create vulture funds. There is another well-managed bond fund that does nothing but mortgages and they are just chomping at the bit to get at some of these distressed prices on some of these mortgage bonds where they might be able to pick up mortgages for 30, 40 cents on the dollar. just as you did in 1991. When the RTC took over a lot of these failed S&Ls, if you could find your mortgage pool, I know people that bought their mortgages for 60 cents on the dollar. And that's what we're going to do this time just as DH Horton liquidated, I think it was 80 condos last week for almost 40% below their asking sales price in an auction. You're going to see more of this by the main builders as they just start to slash, getting rid of everything from large land tracts that they had bought, to huge amounts of unsold inventory. They are going to start going in to liquidation mode and for those that are waiting for housing opportunities, it's going to be a great opportunity. [10:58] JOHN: So like everything, we'll get through this but it does help to know what you're doing as you go through it. You know, I’ve been talking to people and you're hearing people say more and more why, you know, this person's home was foreclosed on. I was talking to an airline pilot today and he was saying, “this person's home got foreclosed on. That wasn't fair. This was rough.” and blah blah… But I thought, they knew they were stepping into this. Where is moral hazard and moral risk in this? JIM: Yeah. When you get into something and look at all of the undocumented no-doc loans where people basically – a friend of mine does home equity loans for a major lender here. And I mean the stories he tells me about people lying, you know, like janitorial service making 20 grand a month. Yeah, sure. Or somebody that sings in a church choir making over 100 grand a year. I mean people were lying and banks were looking the other way because they really didn't care. They didn't have their skin in the game because all they were going to do was take that mortgage, repackage, securitize it and sell it to somebody else. If it was -- had to remain on their books, I'm sure we would never have seen the kind of lending practice says that we've seen gone awry here in the last three-to-five years. But they had no skin in the game. They were going to off load it into the securities market. And that’s why we still haven't seen how this is going to filter its way up through the food chain to the bigger banks. We've got a glimpse of that with some of the write-offs. But, you know, what's coming next, John, is as these write-offs start to impact the balance sheet, the banks, which have been very skimpy on their loan loss reserves (it’s one of the ways they pump their profits) in the last couple of years, they are going to have to increase their loan loss reserves. So that's why in this next reflation I would avoid financial stocks at this time because I don't think they are out of the woods yet. But, you know, when you take a look at this, how are we going to get our way out of this? We're going to get our way through this, John, but it's going to come at a cost. And the cost is going to be higher inflation and bigger government. [12:59] JOHN: Don't forget you're listening to the Financial Sense Newshour at www.financialsense.com. And if you'd like some information about the types of accounts that Jim manages you can find that at www.Puplava.com. That’s Pup and lava. Think of a puppy stuck in lava. That's an awful thing to think of. Woof, woof, woof. Anyway, www.Puplava.com. You'd be surprised how many people I have to tell that to. They go, “how do you spell that?” I say just puppy lava, Puplava. There it is. Now, the jobs numbers came out this week and it's important we look at that. Theoretically, the spin on it right now is that the number of jobs is up, that means the economy is stronger. Yada Yada Yada. But as we know from all of these facts and figures that come out from our friends inside the Washington belt way, the devil is in the details. JIM: Well, you know on the surface, John, you look at the numbers: 110,000 jobs were created. That would suggest, well, the economy is still holding on. It's very strong and also they revised the August job numbers which showed an initial loss of 4000. So a gain of 89,000. But one little statistic that came out that nobody talked about, the Bureau of Labor Statistics went back – this is quiet, it's buried in the back pages – and they revised the March 2007 payroll numbers. And they said that they were overstated by roughly 297,000 jobs. So you really got to take as suspect here the economic numbers we're getting today – whether it's on the unemployment, the jobs numbers, whether it's the CPI or the economic numbers. The reported numbers continue to run counter to, you know, the other employment indicator such as new claims for unemployment that just went up, or the collapsing help wanted advertising index. So there is a lot of stuff. And depending on which way you look at it – as we talked about in the first segment with Paul Nolte – there was stuff for the bulls and stuff for the bears. And a guy that does a lot of dissecting, a guy by the name of Greg Weldon, Weldon’s Money Monitor, dissected the jobs numbers and let's talk about some of the positive stuff. First of all, health care employment expanded by 33,000 during September taking the 12 month gain to 396,000. So health care is doing well. Foods services and drinking establishments mainly restaurants 25,000 jobs created in the month, 355,000 the last 12 months. Technical services were up 37,000, and government jobs up 37,000. So household employment exploded rising 463[,000]. Now, here is something that people were talking positively about is hourly earnings exploded rising from 17.40 an hour to 17.63; and average weekly earnings soared by 11.35 cents to $602.95. So the earnings were going up, but we'll get to the devil in the detail in just a moment. So if anything, you know, there is a lot of good news there, but when you take a look at where the jobs are being created, it's being created in service industries: Hospital, daycare centers, doctor's office, nursing, bars, restaurants and schools. They were all in service industries. But you know, on the flip side where wages are higher, you're seeing building supply stores lost 17,000 jobs, credit intermediation – that's basically in the lending business down 46,000; manufacturing down 18,000. In the last 12 months we've lost 225,000 manufacturing jobs in this country. Contracting jobs down 15,000 – 160,000 over the last 12 months. The construction employment rate has gone from 2.1% in September of 06 to 3.2%. So we have a rising unemployment in construction, rising unemployment in financial, rising unemployment in retail, rising unemployment in manufacturing. There are more people today that were not working in September than there were in August. And, you know, if you take a look at something, a lot of this stuff just doesn't make sense. For example, you have construction employment is down 14,000 in the month of September. That's the third straight month of job losses, with a decline of 22,000 in August and 16,000 in July – not to mention a loss of 12,000 posted in the month of May. So we've had month after month of construction job losses, but yet if you look in the detail they provide, construction average weekly earnings has risen in each of the last three months jumping $4.59 per week in September on top of an August increase of $6.05. So even though we've seen construction jobs falling month after month, average weekly earnings have soared, increasing by an eye opening $38.28 cents per week, outpacing the total wage increase by almost a 29% increase. So how can you have rising wages and falling employment. I mean just the whole job numbers all become suspect. The other thing, as Weldon point dollars out in his newsletter, the bulk of growth in the civilian labor force was among those persons without any college education. So you know, you take a look at these jobs, a lot of these people don't even have high school education. In the meantime, if you look at the labor force, those individuals that have the highest level of education, let's say bachelors degree, masters degree, employment has plummeted and has dropped by almost 462,000. So the unemployment group for educated people is unchanged but the number of unemployed people has spiked to the upside over the last five months increasing by almost 406,000. So, you know, once again, John, as we get to these employment numbers, it's all not as it appears. And that why I think there is an underlying uneasiness in the economy today because nobody knows what too believe. It's, like, you know, they are talking about the stock markets going up, the core rate of inflation is down, economic growth is at 3 or 4%. You know, the unemployment rate is the lowest that its ever been, but there are more people out of work today than there has ever been at any time in this country's history. So all of these, the economic numbers that come out, I would call them political numbers because they are all massaged. [20:21] JOHN: Well, aren't these based on birth-death type thing as well, so they are not even counting – JIM: Oh, gosh, they have that – who knows what other kinds of things that they are tweaking. I mean they are tweaking the labor rate. It's just like the construction job figures. How can you declining employment over a five-month period and rising wages in every single month? It just doesn't compute. Anybody with an IQ over 100 would say wait a minute, that doesn't add up. And it doesn't. And I think that's why there is sort of a disconnect out there. People haven't quite figured it out because you turn on television, what are you going to hear? You're going to hear the happy talk, “hey the Dow hit a new record today” or “the job numbers were great, the economy is strong, it's growing faster, there is no inflation and inflation is going down.” And then you have to look at real world on Main Street. The life that you live on a day-to-day basis may not compute with what you're seeing on television, in magazines or in newspapers. [21:18] JOHN: I always point out politically as long as people are happy you can live with that kind of dissonance, but as things begin to fall apart and the dissonance in people's minds between what they are experiencing and what they are being told is the real world out there, that then begins to lead to, I would guess, distrust in government or the financial system or both. JIM: We haven't quite got there yet because our propaganda, John, is much more sophisticated in the information age. And, you know, what do you see constantly are artificially manipulated numbers in GDP, artificially manipulated numbers in the CPI, artificially manipulated numbers in the job report. You know, they talked about, hey, the number that we had in the month of August where we lost 4000 jobs, that was revised and we actually had 89,000 jobs. But buried in the fine print is they go back and they say, but the March numbers were revised and they were lower by 297,000 jobs. Now, that's buried in the back pages and nobody is going to see that number. The number that everybody is talking about is the economy created 110,000 jobs last month. [22:27] JOHN: And everybody talks about it as though those were hard numbers. JIM: Yeah. And then when they'll get revised six months down the road, nobody will pay attention to it. JOHN: Getting back to our favorite subject, Jim, that of gold, which we were talking about earlier, listening to John Doody or Frank Barbera, it would look like it's getting back to being a very bullish situation in the gold market. JIM: You know, John, let's just take the commodity gold itself. If you go back to the summer of 2001, gold bottomed at 255. Here we are this Friday looking at gold prices at 742. So we've had almost a three-fold increase in the price of gold. Now, to put that in equivalent terms, and this is something that the market doesn't grasp, and that's once again all the propaganda that we have, that would be the equivalent of the Dow being at 30,000. Let's say the Dow went up three-fold from where it bottomed in 2002. I think we were in the 9,000 level. So let's suppose the Dow is at 27,000. If the Dow went from 9,000 in 2002 to 27,000 today, everybody would be talking about it. But yet, we've had the price of bullion go up three-fold since that time. And even more so that is in my mind just explosive. We had the XAU index which bottomed in November of 2000 at 41.85, today the Index is at 171. So just as we've had a three-fold increase in the price of bullion, John, the XAU has gone up 309%. And if we take a look at the unhedged gold stocks in the HUI, the HUI is at 393 this Friday. You know, the HUI has gone up 995%. Do you think that would get somebody's attention? The gold stocks, unhedged gold stocks have gone up almost 1000% and people, you know, are rushing off to buy Google. [25:09] JOHN: Maybe the name says it there. I don't know. JIM: I mean it's absolutely amazing. And that's why I still think that this is very reminiscent of all bull markets. You have three phases. The first phase the smart money gets in. The second phase the institutions get in. And the third phase of the bull market, the public gets in. And I can tell you right now, John, you may have institutions that are saying, okay, we'll put a little bit in gold. But from what I'm seeing and I take a look at the holdings of the major gold stocks and the way the XAU trades and we've been in these consolidation periods and they usually last anywhere from 12 to 18 months, you know, the institutions just trade in and out. So even the institutions aren't firm believers that we're in a bull market. I mean if you really believe you're in a bull market, you just sit and buy. I mean if you would have bought five years ago, think of your profits – up almost 1000%. And this is just getting ready to launch. It's going to go much, much higher than anybody even dreams. I mean literally there are going to be fortunes that are going to be made here. And nobody is picking up on it. And it's amazing, John. We've got everything going for gold right now. We've got monetary reflation, we've got supply constraints, we've got growing demand. We've got geopolitical risks. Demand is outstripping supply, which is one reason the price is going up. I mean everything added together. And the greatest opportunity – you can see this if you look at the gold stock indexes, you know, they'll have a huge run up. For example, if we take a look at HUI which bottomed in November 2000. It was at 355. In a two year period it went from 355 all of the way up to almost 150. So if you take a look at the bottom in the HUI, which was reached in November of 2000, till hitting its first peak in the summer of 2002, you have over a 300% increase in gold stocks in just a very, very short period of time. And then we went through sort of this consolidation. I can remember we first started having Dave Morgan on the program in 2002, and I remember very distinctly the summer of 2002 because I was being mentored by somebody at that time on the gold markets, and we went from 150 all of the way down to almost 98 during that summer. You remember, John, all of the nasty emails we would get. And gold consolidated from May of 2002 all of the way until roughly the summer of July of 2003, and then the index broke out again and it went from 150, it went all of the way to 260, a little over 260 – a one year time span. And then we consolidated for almost a two year period from the end of 2003 all of the way until the end of 2005. And then from 2005 the gold market took off, gold stocks took off, the index went from 250 all of the way to 400, and we've been in this consolidation pattern since April of 2006. And now, I believe we're getting ready to break out. [28:37] JOHN: Well, if everybody is trading and you really do think this is going to be explosive, where do you think the opportunities are going to be here? JIM: Boy, I tell you bar none, John, and especially after this summer's blood bath it's got to be the juniors. I mean you've got gold over 740, you've got silver at 13.40 and we're buying juniors getting gold in the ground at 14 bucks, 20 bucks and $30 an ounce. And I'm talking about measured and indicated ounces, John, they are just literally being trashed and given away. And the thing about juniors is because they are thinly traded they can plummet, just as you've seen during the summer. But conversely, on the opposite side, when everybody wakes up and as Frank was talking about the first hour, the next phase is going to be rotation and it's going to be a launch in the juniors. And everything we're looking at right now, you know, John, we're loading up on juniors. We have a lot of juniors in our portfolio. But I think this next launch is going to be breathtaking in terms of its next acceleration, it's speed and the heights which this goes to. And you can just see it, you can just almost feel it. I mean if you take a look at the industry, the industry is struggling to maintain production, costs are going up. Not only by quarter – I mean if you take a look at the weighted average cash cost in the June quarter just reported was $353 an ounce, that's 25% higher than a year ago at this same time. In fact, that’s up 6% from the March quarter. And everywhere I look at cash costs are going up. And you've got a situation where companies -- the only way that they are going to employ and make capital investments is only if they can feel assured that they are going to get a return on their investment and be able to recoup that cost. Supply just like the oil business is struggling to keep up. And let's face it, John, there are not many El Dorados out there. There are not many Aurelians. Aurelian reported its first resource estimate almost 14 million ounces, probably the largest single gold discovery in the last two decades. You know there aren't a lot of Aurelians out there. There are some projects out there that are going to end up about three and five million ounce deposits; and I think one in Canada is going to end up being anywhere from a five to ten million ounce deposit, and the stock is being trashed, it's being ignored. It had a great run up last year, it was up over 100%. But these are the kind of opportunities that are out there. This is the kind of stuff I just absolutely love because, I mean, personally, I've been buying every single month, I've been buying juniors going all of the way back to May on a monthly basis and John, I just – there is that instinct that you feel, you know, when all of the stars are lining up. And I think this next run up is really going to be breathtaking. And I think what we're going to do is we’re going to take out the old highs of 850. That will catch a few people. That will bring more institutions into the market but then I think we're going to go quickly from 850 to 1000. And I'll tell you, John, when gold breaks $1000 an ounce and silver is around $25 an ounce, then I think you're going to see the media start to focus on it. And you may see gold go from 1000 to 1500 very quickly as the public and everybody else catches on as money comes into mutual funds, the mutual funds will have to buy the gold stocks and they are going to drive it up. And I'll tell you, when money starts coming into the juniors, John, it will not be unusual to see a junior go up 100% in a single day. I mean that's the kind of stuff that you see in this kind of period. So quite honestly, the way I look at, I just think we're ready to launch and this is probably going to be probably something that is so spectacular. It is just going to be eye popping in terms of watching the magnitude of where these stocks, I think, are going to go. I mean I really believe this. I mean it's just – I was talking at the Denver gold conference, you know, Keith Barron who started Aurelian, they just reported the resource estimate this week, and John, while they were building that for two years, the stock went from 2.50 down to 40 cents. [33:04] JOHN: You know a lot of times people just focus on, what, the price when we're looking at stocks or things like that. They may just think something is wrong with a particular offering. But if you look at say, for example, Aurelian and you look at that story where you had the right people, the right circumstances and it really went places. But you have to look at more than just the price. JIM: Well, sure. I mean, for almost a two year period, Aurelian was doing everything right. They were doing -- surveying other projects, they were finding, they had their first resource estimate in 2005. Aurelian was doing everything right, John, but the stock price dropped in 2004, went down further in 2005 and for the first quarter of 2006 until they got their first assay results from their large discovery, it was going down in 2006. I mean you're talking about a stock that went from a high of close to $2.50 in 2004 all of the way down to 40 cents. I mean an 84% drop in the value of the stock and that was up I think 8000% last year. That's the stuff that happens with the juniors And I mean there is a junior in Canada right now that has got five or six additions that they've added to their property. They've got large measured and indicated ounces. They've got a huge new gold area that could turn out to be one of the biggest gold discoveries in their whole portfolio project. The stock’s been trashed this year. But that's what happens. And that's why when you're in Juniors, you've got to buy a basket of them. You've got to believe in the people that are running the company or the property and then what you do is you sit and you hold and you wait for that discovery or that phase. Like the dance of the honey bees, one day the hive wakes up and says holy cow, look at this. And then all of a sudden it's discovered. And when that happens it becomes the hot property, the hot stock and it just goes up two, three four, five fold. I mean that just is the nature of the junior business. But you're absolutely right, I mean, if you just focus on price you can say oh, the stock is down, there is something wrong. It may be that there is something wrong, but, you know, sometimes Aurelian had problems initially in trying to get a handle on their metallurgy, but you know, they worked that out. If you have a problem, you've got to ask yourself. Is it fixable? Do they have talent to fix it or can they find new talent to fix it and is it in a good area? Is it a good property? Is it in a prolific gold belt? Is it in a mining friendly area. If you have a situation where a stock isn't doing well and it's in the middle of the most prolific area in the world and other stocks around it are doing well, then you know it's a matter of time before the market finally wakes up and catches up. There are other companies around Ecuador that were doing very well during a period Aurelian wasn't. But, you know, one day they had the discovery, they got the assay results and the rest was history. That's just the nature of the gold business. [36:18] JOHN: Time to drop over to the Q-line and see what people have been leaving for us. I should remind you that the Q-line -meaning the question line – is open 24 hours a day to take your calms for questions for the program. The toll free number in the US and Canada is (800)794-6480. It does work in the rest of the world, but it is not toll free from anywhere else but those two countries. Also the radio show content here is for information and educational purposes only and you should not consider it as a solicitation or offer to purchase or sell any securities. And responses to your inquiries are based on the personal opinions of James Puplava. We are unable take into account your suitability, objectives, risk tolerance. And as such Financial Sense Newshour should not be liable to any person for financial losses that result from investing in any companies profiled on the program or any other stocks or information. I should also mention too last weekend we had a little trouble getting some of our links up on the site. We did get that fixed. A lot of people called the Q-line to tell us about, but we only check the Q-line once a week just before the show on Friday. It’s usually Friday morning or Thursday night to see what people are asking. So if you're calling in an emergency call like I can't get the program, we ain't going to hear you for another week. JIM: We had a problem last week. Our servers were swamped and overrun with people trying to get to the program and what happened is we had a bit of difficulty but that's been corrected. But you're right, John, don't call the Q-line for that because, well, we don't have technicians around 24 hours a day for that. When something does happen, easiest way is just to email us. That alerts us and then we respond to it. [38:29] JOHN: All right, the first call is from Bill in Virginia. Hi, this is Bill from Virginia, love your show. I wanted to ask a question. I noticed William Engdahl has posted an article on his site where he makes an empirical case for abiotic oil. I'd love it if you could get a debate between him and perhaps Matt Simmons. At any rate, the case that he makes is really rather interesting and I would love to see a critique of it. JIM: I'd love to get Matt Simmons to debate him. You know, it was funny when last year CERA came out with their report saying that we were going to have a gazillion barrels of oil out there, we invited the CERA people to come on with Matt and they turned us down. It's very hard to debate Matt because he has his facts and no one is more factual than Matt Simmons. In terms of abiotic oil, we've looked at it and let's put it this way, if abiotic oil was replacing itself, the United States would be replacing itself as well. And our production has declined every year since 71. [39:31] Hey, Jim and John. This is Josh calling from outside of Prudhoe Bay where drilling rigs are so shorthanded they are building new ones. Anyway, my question is how is the investment climate in Bolivia? Thanks. JIM: Not big on Bolivia, Josh. Bolivia, the president of that country is a friend of Hugo Chavez. You've got to be very careful. There are a few of those people down there that don't believe in contract law and believe in confiscation of assets. And Bolivia is something that's very unstable in terms of contract law. And also there is, I think, big political risks there. [40:11] JOHN: The next two question are related to something that we were talking about a couple of weeks on the program about the Alberta oil tax, so here is the first one from Terry in Edmonton. Hi, Jim, Terry from Edmonton, Alberta. Enjoy your show. Just a little explanation I guess on the Alberta tax, the oil tax, the issue I keep hearing come up on your show. Basically what happened is they haven't done anything yet. It’s been for years now there has been an outcry from people from the opposition party that Alberta is not collecting enough royalties for the oil that the oil companies recover. So under pressure the Alberta government had a independent group do a study and basically decide if Alberta is collecting the right amount of royalties. And the independent group came back and said no, they said that Alberta is being shortchanged for say. They compared other nations, oil nations, and they suggested that, yes, that the other nations do charge significantly higher royalty rates for their oil and reserves. So anyway, this was submitted to the Alberta government. The Alberta government says that they would come back in the middle of October and give a decision as to what they were going to do, whether they are going to increase royalties or leave it status quo. So that's where we stand now. One of the issues with Alberta is our economy is absolutely over heated. We have probably 5 ½, or 6% rate of inflation. The cost of living is just off the chart. And the dilemma of the Bank of Canada is it cannot raise interest rates to cool down Alberta's economy because that would hurt Eastern Canada, primarily Ontario which is manufacturing. Their economy isn’t nearly as supercharged as Alberta's. So you could almost see the Alberta government considering raising royalties just to try to dampen the economy in Alberta and maybe bring down the inflation rate. But anyway, nothing has been said yet. So anyways, just thought I'd clear that up a little bit, I hope it shed some light on the subject and as I said, I enjoy the show. JIM: Terry, thanks for calling in with that information. If you can do me a favor and email me if that study is public. In other words, if it's published and it's out there on the web some place. If you can email that to me, I'd love to read that study and just see what that study says. [42:28] Hi, Jim and John , this is Tim in Vancouver, Canada calling. Many thanks to both you and the crew of Financial Sense. My neighbor Jim and I have become good friends over the years rehashing the different subjects that you and your guests dig into each weak. Many Sunday afternoons are spent in a driveway round table strategy session. I'm calling today to assist my fellow Canadians and last week's Q-Line caller, Art from Calgary with the “we are not Venezuela of the North” campaign. Since the news of the report that recommended an increase in oil sands royalties there has been a lot of feedback. I agree with John Loeffler's response that followed Art's call. The government is testing the waters to see what kind of reaction this report would solicit – there has come a swift reaction from Encana Corporation to announce that they would cut spending in the oil sands region by a billion dollars next year should the maximum royalty boost be adopted by the province. Many smaller players have also upped the wager with similar announcements. High stakes poker is being played in Alberta oil sands. And I’m with Art in believing that the new government will not go all out and risk pushing the golden goose away from the table. A formal response from the premiere is due in mid-October until then the driveway round table here is buying the dip. Thanks again. JIM: You know, Tim, you bring up a question because look at the response by the royalty trusts to taxation. They've cut back on expenditures and expansion. And oil – and especially the Canadian oil sands – oil sands production is very capital intensive. It costs much, much more – I think the costs are over $30 a barrel – if I recollect to produce one barrel of oil out of the tar stands. So if the government take as a good portion of that in the way of royalties, just like Encana, that's just going to mean there is less profit on the table to reinvest in terms of capital investment. So there is always a risk of that. So I'm going to hopefully our previous caller will send me a copy of that report Terry from Edmonton and I can take a look at exactly what they are proposing and get more of the details. But the more the government takes, the less capital is available for investment. And that's always been the case in all markets whether Canada, the US or elsewhere. [44:48] Hello, Jim and John , this is Donald here in the UK. And I have a question about silver futures. Now I've got silver futures I've been holding around for a couple of years now and I have what to me is quite a big position. And you refer to – or reading through the literature you come across the attempt in the early 80s with the Hunt Brothers skewered by the Comex pretty well. I think they changed the rules to prevent anybody actually exiting their position. And they were actually trapped in there. You could buy you couldn’t short or exit. So when actually the price came down a lot of people were actually trapped in there. Now, what do you think is the chances of that same thing happening again? You're talking this week with silver going to $25 plus, maybe in a year or two, who knows where it’s going to be in three years, and you wonder what kind of fun and games would the New York boys have to control this like they did once before. I would really appreciate your opinion, your take on that issue and I look forward to hearing that. Enjoy the show as always, guys. JIM: You know, Donald the chances of another Hunt Brother cornering the market I doubt will ever happen again. The closest thing we've seen since the Hunt Brothers was Warren Buffett's purchase of silver. And the first time the government put a kibosh on it and it may be one of the reasons that Buffett decided to unload it because certainly Berkshire had the capabilities with their buying power to corner the market. I just think it would be real hard. I think the government would be all over anybody trying to do it unless it was a foreign government. And even then we would be able to put pressure on foreign governments one way or another. I don't see somebody cornering the market. [46:52] This is John from Illinois. I want to comment on the nature of peak oil and who is really pulling the strings. It's reported that there are secret memos put out by Royal Dutch Shell and other oil companies that suggest that peak oil is really a fraud. And Jim commented last week that if these things actually existed, the Congress would be all over this and be holding investigations. But with all due respect, Jim, that's rather naive, don't you think? Everything that Congress does is for public consumption. They can call an Investigation but the fact of the matter is the oil mafia controls the politician. Anything the politicians do is merely for show for the voter's sake. The oil Mafia has controlled Washington for decades and it does not appear that their control has been loosened. And I'll give you the prime example of the war in Iraq. That is, a war that was foisted on the American people for one thing: oil. So they’ve got a pretty good grip on the Washington politicals, I think. But anyway, also the taxation of profits on oil, who really pays that tax? The oil companies don't. They pass it on the us, so if they want to go after extra profits, the politicians, it's we the consumer who winds up paying it, not the oil company. This is as basic as ABC, and anybody who knows anything about politics knows that it's all a show. Great show, keep up the good work, but I have to sort of disagree with you about your view on peak oil regarding the corrupt politicians. JIM: Yeah, John, I'm going to disagree with you once again. If there was some company where they found out that there was a conspiracy to hold back the price of oil, the reason I don't think that applies, John, because if you look at how oil is produced in the world today, the smallest producers in that 84, 85 million barrels a day are Western oil companies, they only control about 15 to 16% of the world's production. The other 85% comes from what we call NOCs or national oil companies. The Western oil companies, the Exxons, the Shells, aren't in the driver's seat. You need to go back and listen to an interview that I did last year called The New Oil Titans which is about the national oil companies. The other thing is if you were an oil company today and you're spending money and you could make a discovery where you could find oil somewhere where you could do it at a cheap price and sell it today at world market prices, as a capitalist you'd be jumping all over that opportunity. If you look at where the world's oil reserves are controlled today: 75% of it is controlled by OPEC, 10% is controlled by the former Soviet union. That's 85% of the world's oil. So 15 percent is controlled by the West, and I'm sorry, but somebody that controls 15% of the market doesn't control the market. The people that control the market are the people that own 85% of the oil. [50:03] Hi, Jim and John, Mark here from British Columbia Canada, love your show. Quick question has your scenario number three, which is the capital market crisis, occurred? In other words what we saw on the August 16th date was a pretty big blowup in the markets here. Do you think that's played out or do you think that has further to go? JIM: You know, Mark, I still think it has further to go. As I mentioned in one of the earlier segments we have 600 billion in mortgage resets between now and next summer. We're seeing those losses work their way up the food chain with the banks with the beginning of the earning season where Citigroup basically has taken losses. I think banks are sitting on a lot of losses. We've got about 300 billion, I think, is the figure I've seen of losses that are going to transpire over the next 12 to 18 months. So, no. I still think we have further to go and the fact that we've got already Federal Reserve governors saying that a half a point hasn’t been enough, these guys are probably talking to defend the dollar and we've got more of a crisis to get through. But in each crisis they are going to respond by injecting more money and cutting interest rates. So, we're not done yet. [51:15] Hello, Jim and John. This is Richard from Buenos Aires from Argentina. Jim and John, I really enjoyed last week's round table discussion on the sad fate of the US dollar. But at the same time I couldn't help but wonder how you and your guest might have changed your forecast for the dollar and the US economy if they had considered the economic consequences of the US military action against Iran. Would you please speculate on how an Iran war would effect the US economy and the US dollar? JIM: Well, first thing an Iran war, you would see oil prices spike over $100 a barrel. The fall out would be a massive. You could see a massive pull back in the market, especially if it didn't go well or if there was a follow through afterwards in terms of something that happens militarily or a terrorist attack. But I think what they would do in this case, Richard, is they would do what they always do: Flood the markets with money much like they did after the attacks of 9/11. That would force the dollar down. As the dollar was forced down, it would force other central banks to inflate and we would just even have more massive reflation. Pay particular attention, I forget which segment, I think it was in the first hour when I read the comments made by the President of France when he says, “hey, we're not going to let the Americans expert their crisis to us. If they are inflating we've got to inflate and we'll devalue against their devaluation.” So that's what would happen. Yeah. The dollar might drop, but, you know, depending on how well it went. [52:57] Hi, this is John from Indianapolis. I have a question regarding inflation and the repatriation of US treasuries. Everybody's afraid that once the world starts selling US Treasuries that’s going to be hyperinflationary in the US. But just the act itself might not be inflationary. Here is why. And tell me what you think. What if Hans has a US treasury, sells it for dollars, and he wants to convert the dollar to euros or goes out to find Henry in the United States who either borrows euros or has euros. He gives the euros to Hans in exchange for the dollars and Henry has the dollars. Hans has the euros. Somebody else has the US Treasury. But nothing really new has been created. You don’t increase money supply; it has to be loaned into existence. So you haven’t really increased the money supply anywhere at all. And in fact, this individual act, I would argue, could even be deflationary because Henry could use those dollars to go pay off a loan and thereby shrinking the bank balance sheet. Certainly the repatriation of US treasuries could raise interest rates for the United States of America and that would be a disaster, but I wanted to make this comment and see what you’re thinking. And I'd certainly argue that an increase in money velocity is really the grenade that could start the hyper inflation, but I wanted to see what you guys were thinking about. Thanks a lot. JIM: You know, John, you bring up a good point because really you're just transacting paper back and forth. You're not expanding the supply of money. Money supply increases when someone makes loan and credit expands. And actually, if you take a look at what's been happening with the dollar, even though foreigners have actually been selling some of their treasuries and the amount of buying Treasuries has gone down, on the other hand, foreign buying of the US equities and real assets has been going up more than the average buying. So what is happening now is foreigners are recognizing and especially with these sovereign funds that are coming into existence, that we've got real inflation. I mean they know. They are creating it. And so what is happening is they are exchanging one form of paper for something that's more real. And I think that’s what's taking place: instead of buying Treasuries, there is less buying of Treasuries, but what is happening is they are buying stocks. But they are not buying stocks to the same tune that they used to buy treasuries. And hence the dollar has been falling as a result. [55:26] Hi, Jim and John, Jeffrey here in Austin, Texas. And I wanted to ask a question and see if maybe you could touch on the subject of inflation and deflation. And Paul Tecate, I'm not sure I'm pronouncing his name right had an interesting article, can we have inflation and deflation at the same time? And this is another issue that Mike Shedlock talks about a lot. And I'd love to have Mish appear on the second hour of the show sometime, and John talk to him about deflation. I've done a lot of reading on the subject, but I'm not quite so sure what I know which one is coming or in which order they are coming. JIM: Jeff, I think the confusion from inflation and deflation comes from the definition of what inflation and deflation is. I come at it from an Austrian perspective. My definition of inflation is an expanding supply of money. Deflation is a contracting supply of money. That is what Austrians believe constitutes real inflation. And when you have an expanding money supply, you can have falling assets in one category, such as what we're seeing in real estate now and expanding assets in another category such as we're seeing in stocks and commodities. Where I think the confusion comes in is they take a look at inflation and deflation from a Keynesian perspective and describe it as inflation is rising prices, deflation is falling prices. So if you see, for example, the stock market is going up and commodity prices are going up, they would say, okay, we've got inflation in that sector. But if you see falling real estate prices, they might say, see, we've got deflation because the value of real estate is falling; or you have manufactured goods that are coming down which is a natural outcome of production. And I think what happens is they confuse the definition of what constitutes inflation. And I can tell you this, Jeff, you just take a look at money supply growth anywhere around the world, of the top 20 central banks, every one of them is inflating their money supply and is growing at double digit rates. We have no deflation. We have nothing but inflation. Now, you can describe the after-effects of symptoms, but symptoms aren't the cause of inflation or deflation. Expanding or contracting money supply is what constitutes those two. [58:02] Jim and John, this is Ira from Omaha calling. I would like to request your help with a couple of questions. I have been reading some literature on mutual fund investing and I keep seeing the statement investors that are not very experienced should show clear preference for index funds. The reasoning I get with this advice in a nutshell is that actively managed mutual funds only do about as well as index funds but charge higher fees. If possible, please give me your thoughts on this. Another statement that I keep stumbling upon is two trends that are supposed to hold over the long run are that small caps beat the large caps and value beats growth. Also related to that, I am then told that one should consider investing in: a combination of a total stock market index because it gives you maximum diversification and tax efficiency; plus some small cap value for diversification. Again, if possible, please give me your thoughts on this one also. As always, your comments are greatly appreciated. Thank you very much for all of the information and keep up the good work. JIM: You know, Ira, investors that aren't experienced, I would agree would be better off in a index fund because unless you understand markets, the business cycle, where we are in that business cycle, rotation of cycles, you may be going into a fund at the wrong time. For example, let's say one sector has been real hot but the economy changes and if you're looking at performance statistics, you'd say, “I want to go in to that fund because it had the best return last year.” But if the markets have changed, sector rotation comes along, or the business cycle changes, that might not be the right fund to be in. So unless you have that knowledge, I would agree you're probably better off in an index fund. And the other question that you have is: two trends that hold up in the long run small caps versus large caps. You know, if you take the roaring bull market in the 90s, it was the large caps that really did especially well; where in the 70s it was the small cap funds that did well. Usually when you go through a rate raising cycle as we're going through now and now we're going through a rate cut cycle where the economy is slowing down, small caps stocks aren't going to perform as well because they are more domestic oriented. With a falling dollar, the international large cap funds are going to do much better. And especially with the slowing economy, you're going to see growth stocks out perform value stocks, because most growth stocks especially like technology companies don't have to finance. They’re usually more equity oriented, they do better in this kind of environment. So the markets change, the cycle changes, and that's why unless you have that kind of background and knowledge, you're better off in an index fund. [61:30] Hi, this is Daniel from Phoenix. Love the show, listen every Saturday. My question is when I listen about the currency markets and the dollar is worth so many euros or so many pounds sterling, how is that calculated? How is one billion of a currency determine respect to a value of another currency? It's always been on my mind. Thanks. JIM: You know, Daniel, it's plain and simple: like all other goods it's determined by supply and demand. If you have greater demand for a currency either you need it to pay for imports or you needed to pay for good or services or you have more money coming in to your country or you have a higher interest rate, that might create demand for your currency. Whereas on the other hand, if interest rates are higher in another country and another currency and you have greater export trade balances in that country, that currency could be stronger. There is a whole host of factors that come in from trade balances to interest rates that determine it. But in simple economic terms it gets down to demand and supply. Greater demand for a currency drives up its value, more supply drives down its value. [62:44] Hi, this is Janice from Alabama. I enjoy your broadcast every weekend. I have an 11 year old grandson that hears these terms like stocks and brokerages and so forth and he has interest in finding out more about it. And I was wondering if you could recommend a book or two that would be appropriate for someone about his age. He’s about 11 years old. Thank you. JIM: You know, Janice, there are a lot of books. You've seen them, they call them the book for dummies. But basically there is a book out there called Stock Investing For Dummies. And it just gets down to explaining how the stock market works, what are stocks, what are bonds, how the markets function, who are the players. And what you want something here is very basic. And I would say that the book out there called Stock Investing For Dummies would probably be a great place to start. [63:36] Hi, this is Morgan. Listen, Jim and John , I have a question for you guys. I've got a very large amount of gold Krugerrands that I keep in a safety deposit box at my local bank. I know all about the gold confiscation that went on back in the 30s, I believe, that's a real possibility of that happening again. But I would think that there would be some kind of advanced notice we would get something like were that to come down the pipeline, I would have a chance to go to my local bank and pull those gold coins out of there. What are your thoughts about a possible gold confiscation and people having notice time to actually go down to their bank and pull those gold coins out of there? I'd like to get your thoughts on that. Thank you. JIM: Boy, I tell you, I just don't like keeping them in the bank. I think you're right. We probably would have plenty of advance notice, they'd probably demonize gold investors, calling them terrorists, profiteers or something. You'd see it well in advance before it came. But you can't rule out: what if your own bank goes under and they close the doors and you might not have access? I could see something like a corralito as they had in Argentina somewhere down the road. And another thing you can't rule out is what happens if there is some unforeseen event that you and I just can't see. There is 450 trillion dollars derivative market blows up one day by triggered by some event that we just can't see and everything freezes up. I mean these are the kind of things that can happen. That's why I just don't think it's safe in a bank. [65:18] JOHN: We're talking about gold confiscation too. Basically, it prohibited American citizens from owning gold except in certain areas for jewelry and a few other things like numismatics. But it really wasn't an outright confiscation like a seizure or forfeiture. There was an exchange that took place. You did get paid for it. It was just that Roosevelt then jimmied the price after he collected everybody's gold. JIM: Yeah. That was where the Treasury fund reserves first surfaced. It was the profit the government made from the confiscation of gold. They gave people 20 and revalued it at 35. Nice profit. JOHN: How do we do that? It's sort of like hedonically indexing your income tax or something. How do I do that? Hi, Jim and John, this is Steve from Seattle, Washington. Thanks for the show. Learned a lot since I've been listening. My question is about the air line industry. In light of the potential peak oil and hyperinflationary crises that are looming on the horizon, what do you figure the future of air travel is going to be in this country and the rest of the world? I'm a new pilot working on my licenses and building my house. I was anticipating getting picked up by a major airline in the next 12 months or so and with the baby boomers retiring in the next so 10 or 15 years I figure there would be plenty of opportunity to be hired by a major airline in the not too distant future. Now I'm not so sure. Does peak oil mean the end of air travel as we know it, and the need for pilots? Do you think this is a bad career path over the next 25 years. Thanks a lot and appreciate any input. JIM: Steve, I think the airlines are going to shrink. They are already doing that now. They are shrinking the number of flights that are out there. And the cost of fuel has become so expensive. One of the reasons I think you see a lot of flight cancellations is an air line today if they don't have a full flight they can't afford to make money and fly a plain half full. So I think air travel is going to become increasingly more expensive. Only business and the very wealthy are going to be able to fly or, you know, the average Joe getting on a plane and flying to someplace for a vacation, you're going to think twice when the prices are three or four times higher from where they are right now. The one area I think will do well is private jet travel. And you might want to look into a lot of these like NetJets and a lot of these other smaller private jets that are flying Gulf Streams and Falcons and some of these other jets. That business is mushrooming. In fact Honda has got a new jet out. I think it costs about two or three million dollars. It’s very fuel efficient and I think you're going to see more of that as a means of and especially if you ever want to get to those hard destinations where you have to fly to a main hub, and then from a main hub you've got to take some puddle jumper to get to some place. I think you're going to see the smaller jet travel and private jets as a booming industry. [68:09] Hello, Jim and John , this is from Alan from Lemington Spa in England on a beautiful sunny autumn morning. My question is this: I've been reading something that the credit squeeze is being followed by a credit contraction where borrowing is more and more difficult for both individuals and for businesses. Turning into a [inaudible] for the UK and probably US economies alike. Any comments on this? And in particular, how does that fit with the idea of the money swarm circling the globe with all of this new money that’s been created finding a place to invest in? How do those two things tie together, or do they? Thanks very much. Looking forward to hearing the program as always. JIM: You know, when money is created and artificial low interest rates are the result, you always find somebody that's willing to borrow money whether it's a hedge fund, an institution or somebody wanting to start a business. The thing that has happened now is in the first quarter borrowing by consumers went down. But then in the second quarter they went up and some of the preliminary statistics I've been seeing just in some of the credit reports are showing that it's going up in the third quarter. What has happened is it's not as expansionary at the consumer level as it once was – especially now that it's getting harder for no documentation loans and lenders are applying stricter lending standards. So that's curtailed activity somewhat. And you're seeing a contraction in the rate of increase in credit in certain circles. And right now, credit is still expanding, but it is just not as expanding as fast as it once did. [70:01] Hey, Jim, this is Daniel. I called a couple of days ago. I had to tell you this. I was listening to NPR yesterday and they were interviewing an executive from Pierre [phon.] international, the international charity company. And he was talking about, you know, he had to change his budget because of what was going on with the dollar and he was talking about there is a country, Haiti, and he said that the dollar had fallen 10 percent against the Haitian dollar. Who would have guessed? Just thought you'd want to know. JIM: It's amazing the falling dollars is affecting everything and especially as we talked about in the first segment it's affecting mining companies where you sell gold in dollars but your costs are going up in your local currency and it's appreciating against the dollar and that's cutting into margins raising the cost of production. So it affects everything. Good morning, my name is Susan from Florida. Thanks very much for all of the fine work your whole team and mostly for sharing it with the rest of us. I have three questions. How far will the dollar drop before something happens to critical support, and what damage will this cause in the currency market? And also will gold reflect this fall from now on? Thanks in advance. JIM: You know, Susan I think it's going to find some kind of support somewhere around the 70 area. We're already getting talks by other central bankers and politician that's if the US devalues its currency we will respond in kind after devaluing our currency. Listen to, I think it was the, oh, the first hour when I talked about the President of France commenting on the dollar’s decline where he was going to, you know, devalue. I expect currency devaluations in response to our own devaluation. What damage will this cause in the currency markets? Well we're just going to see higher rates of inflation globally. It's not just going to happen in the US here. You're going to see it in Europe, you're going to see it in Asia, Latin America. And thirdly will gold reflect this from now on? Gold has been signaling this, you know, that's why we're looking at $700 gold. And that's why even when everyone was take being gold going down it held tough and it never went below 700. I mean look at a chart of gold how long we've held that 700 level. And I think it's going higher. [72:31] JOHN: And at this point every week, John says, “Well, Jim, we've run out of time and Q-line questions. What's coming up next week?” And Jim says: JIM: Well, coming up next week, I'll have the Richelsons. They've written a new book on Bonds: The Unbeaten Path To Secure Investment Growth. They'll be my guest on October 13th. Nathan Lewis, Gold: The Once And Future Money on the 20th. October 27th, surprise. And November 3rd, Bjorn Lomborg, he’s written a new book called Cool It. So lots of great stuff and remember in November, we're going to have our Mining Executive series. You know, I said I wasn't going to go to the San Francisco gold show because I thought it was on Thanksgiving weekend but they are doing it actually the weekend before that, so who knows maybe I'll go to San Francisco this year. I haven't quite decided yet. But anyway, in the month of November a lot of great guests. I hope to get a round table, I’m working on one in oil. Hopefully we can get Matt Simmons and other people back; and also the mining company executives which will be running Thanksgiving weekend. So a lot of great stuff coming up in the weeks ahead. In the meantime, on behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour. Until you and I talk again, we hope you have a pleasant weekend. © 2007 James J. Puplava, Financial Sense ® Newshour |
