The
BIG Picture Transcript
November 10,
2007
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Part
1
The
Confidence Game
FSN
Follies: Shakespeare at the Fed
It
Ain't Over & It's Not Behind Us
Part
2
Which
comes first? Peak Oil or Global Warming?
Other
Voices: William Kovacs, VP of Environment, Technology and Regulatory
Affairs
Part
3
Q-Calls
JOHN: This is one of those weeks that is a newsman's delight because there is never a lack of anything substantive to talk about. You know, if you look at what's been going on this week – the crisis that we're looking at in terms of the dollar and its relationship to other currencies, and just trying to keep the economy afloat – the Fed is stuck between a rock and a hard place. If it raises rates one thing happens. If it lowers rates, something else happens. Both undesirable. It would seem that the old rules are simply not working. The last time we went through a rate raising cycle, we did it in incrementally in little steps. Remember way back in the days of Paul Volcker, there would have been radical changes of interest rates and nobody would have thought anything about it. Now every little tweak one side of the other causes an issue.
JIM: You're right on this. The old rules or the old paradigms don't seem to be working. And I'm just going to run through them briefly, but things have been unusual this decade. We went into a recession in 2001. Normally you see real estate lead us into a recession or an economic slowdown, much as it's doing now. That didn't happen in 2001. Instead real estate prices took off. When we went into this recovery period, all assets rose as the economy came out of that recession: you had bond prices going up, commodity prices going up, stock prices going up. And then when the economy became overheated and there were visible signs of inflation everywhere, when the Fed went into its rate-raising cycle because of the amount of debt in the system it had to do it in incremental steps.
Likewise, here we are now on the other side of that curve and the Fed is going through a rate-lowering cycle. And just as it did not have the freedom to really jack up interest rates in 2004 to 2006 – it had to do it incrementally – I think the Fed is put in the same bind this time on lowering rates. They are going to have to do it incrementally. They are not going to be able to do what Greenspan did and just take the federal funds rate from 6% down to 1%. I just don't think they are in a position today where they could get away with something like that. So I think they are going to have to take us through the rate-lowering cycle and they are going to have to do it incrementally because of all of the various things that they are trying to juggle. [2:36]
JOHN: So basically, the falling dollar and rising commodity prices – and these are going worse in both directions – that we see out there are really placing a very tight clamp on what the Fed's maneuvering room is. And this all creates a really serious political situation too.
JIM: Absolutely. And this is one of the comments that we have been making for quite some time now. What is different is in 2001, when Greenspan began to cut interest rates as we went into a recession (we were in the bear market, we got hit with 9/11) oil was at 18 to $20 a barrel, gold was in the 250 range, we had copper at 60 cents. You look at it today, we have oil prices hovering close to $100 a barrel. We've got gold easily holding its own over $800 an ounce. Silver, instead of $4 is at $15. You've got copper prices and wheat prices hitting a record. And unlike some of the other problems that were occurring in the world at that time, this time the US is the epicenter of the storm. It's the US financial system that is having a major problem now. And unlike the past where we had low commodity prices with not much demand, this time we've got high commodity prices with large demand coming in at the margin from developing countries like China and India. [4:06]
JOHN: And speaking of China, one of the announcements this week that just sort of added shock waves to everything going on around the world was when one member of the standing committee there said that China was going to have to shift something like $1.43 trillion.
into stronger currencies. There is that exit from the dollar we've always been talking about as being a serious threat. We've been talking about it for five years here on the show. I don't know; are we starting to see the beginning of that?
JIM: Well, we had a big selloff in US securities in the month of August. And we're going to get news coming out – I think it's next Friday – but if you follow the Fed data, the balance sheet of foreign custodial holdings at the Federal Reserve have actually been going up in the month of September and October. So because we have such large amounts of debt with our trade deficit – although it's been going down – that we have to borrow, I think it's a matter of not as much money as coming into this country as we need. I mean it's still coming into the country, but it's not coming in fast enough to absorb the money that we need to borrow. And so as a result, the dollar has a lot more competition today. And it's my view as I follow inflation rates around the world, as I follow money supply figures around the world, all central banks are inflating; inflation is rising all over the world because we're on a fiat money system. The only difference, I think right now, John, is that the dollar has competition. So if you're saying, “well, gee, the dollar is really falling and it's depreciating the fastest out of all of the currencies,” well, maybe I have an alternative. I can go into the euro, I can go into the Canadian loonie, or I can go into the Australian dollar or I can go into the Japanese yen or some other currency.
So the dollar has a lot more competition and then there is the ultimate currency, which is gold and I think that's the very reason we're seeing gold prices at over $800 and silver over $15 because precious metals are the ultimate currency. They are the only currency that isn't dependent on a debt. They are debt-free currencies. And also they are the only currencies that aren't depreciating. [6:21]
JOHN: Well, looking at the fact that the dollar is at its lowest level since 1981, it would seem that we are marching right into a dollar confidence crisis right here which really has longer term implications from the geopolitical level as well.
JIM: Sure. We're in a transition where the dollar is losing its status as the world's currency. And even more serious for the dollar is some of the major exporting nations within OPEC and also within the former Soviet Union may want to bill their oil in a foreign currency, let's say in the euro. So we do have a confidence problem right now. And just as you mentioned, John, that Chinese official who said they were going to diversify some of their currencies, they are already in the process of doing that. The Chinese dumped about 5% of their dollar holdings in the last five months. So that is weighing in on the dollar as well and that goes back to the competition. There are more places that you can put your money today than just the dollar. And so the dollar is still going to be around because the euro isn't strong enough to take the dollar's place nor is the Japanese Yen, nor is the Canadian loonie, or any other currency; but basically we've got a lot more competition and there is going to be some alternatives. So it's not going to be all of your money in dollars if you're a foreign central bank. There's going to be money in euros, there is going to be money in other currencies. But you're absolutely right; what we have right now is basically a confidence crisis. [7:51]
JOHN: Well, given that, this sort of reminds me of when you're sliding down a ski slope out of control, it takes a while to skid to a stop. Depending on how far down we go on the this slope, when do you think a trade war would kick in? Is that a viability?
JIM: Well, you're exactly right. There was a story on Bloomberg Friday where the European Central Bank president Jean-Claude Trichet and Canadian finance administer Jim Flaherty were basically speaking out against the sliding dollar. And this was less than a month after they had a Group of Seven officials chose no not to raise any alarm. The last G-7 meeting everybody was saying things are okay. On Thursday Trichet called the slide in the dollar brutal. He also talked about currency shifts as unwelcome; Flaherty said he's concerned at the dollars surge because it's really starting to hurt the Canadian economy. You had on Friday France's president Nicholas Sarkozy step in with his own criticism of the US dollar dropping to a record low; and that's probably going to intensify as the European finance ministers convene in Brussels and the Group of 20 meet in Cape Town next week.
Without a shift in signals from either the Bush Administration –which is hailing the dollar's decline as a stimulus to US growth – they are talking about that here in terms of either intervention or something that they are going to have to do. Sarkozy has been very vociferous in saying: “You're not going to export your inflation here. We will respond in kind.” And certainly if you look at European money supply growth it's in the double-digit range. If you look at Canada's money supply growth, it's at 8%. If you look at most of the major competitors to the US, they are experiencing double-digit money supply growth. And of course you've got the Treasury Secretary saying, “yeah, we support a strong dollar,” as they wink; but I suspect –as it's been suggested here in this Bloomberg article – that there is going to be some kind of response to this. And Friday, Canada's prime minister said Canada's trade surplus narrowed to the smallest that it's been since 1998 as exports have slumped. So the fact that the dollar is going down isn't hurting other countries is simply not true. We are seeing it take place. And I suspect it's in nobody's interest to see the dollar collapse because it is going to have an impact on other economies. [10:10]
JOHN: You know, you were talking about the fact that President Sarkozy of France was getting concerned. Foreign lenders, by the way, are getting really vocal about this whole thing. But isn't the problem also that the dollar is depreciating against the wrong currencies too?
JIM: Sure. It's falling the hardest against Canada, and some of the hard currencies or petro-currencies – the Russian Ruble, if you can believe that. But there are a lot of currencies like China, which still has a peg – yes, it's allowing its currency to appreciate, but it hasn't appreciated as much as, let's say, the euro has against the dollar; and you have, like, for example, a lot of the Asian currencies are still pegged to the dollar. So one of the problems is the dollar should be depreciating more against the Asian currencies where most of our trade imbalance arises, especially with China. [10:59]
JOHN: Here we are. We're in one great big free-fall right now. What is it going to take to break this before we hit the bottom?
JIM: Well, in the Bloomberg article on Friday, they are already talking about intervention, or coordinated intervention, by central banks. And if this continues, I would suspect at some point there would be some kind of policy response: “If you're going to devalue, we're going to devalue.” Especially if it starts eating into the point where let's say Canada goes from a trade surplus to a trade deficit, or you see the European economy slow down dramatically as their exports fall. They can export to China, but can they export as much to China to, let's say, to make up for what they won't be exporting to us as their currency gets stronger? I don't know.
The problem that we have right now is the Fed is sort of caught in a bind. They’re in a high wire act; and you can picture the clown at the circus that's juggling all of these balls in the air. The Fed is trying to keep the financial markets stable. They do not want to see the financial markets go into a free fall like we did between 2000 and 2002. They are trying to juggle the economy which they know – contrary to the way they speak – is slowing down. In fact, they alluded to it's going to slow down even more in the fourth quarter and next year. And at the same time, they are trying to juggle the dollar. They don't mind the fact that the dollar is going down. What they don't want is a free fall. So in a way, the Fed is sort of trapped in its own little perfect storm. They’ve got a storm going in the financial markets, they have a storm going in the economy and they also have a storm going on with the currency. [12:39]
JOHN: We're also seeing this is a storm of its own creation as a matter of fact. It's like a self-feeding hurricane. And if you watch C-Span this week, I would say the confrontation between Congressman and presidential candidate Ron Paul, and Fed chairman Ben Bernanke was equally as stormy. Let's listen to what Ron Paul had to say about it being a storm of its own creation.
RON PAUL: And the bubbles occur when we have this malinvestment and the creation of new money. So my question boils down to this: How in the world can we expect to solve the problems of inflation, that is the increase in supply of money, with more inflation?
BERNANKE: Congressman, first just a small technical point. On the growth in money, money growth has been pretty moderate over the last few years. The increase in MZM is probably related to the financial turmoil. People have been taking their savings out of, you know, risky assets, putting them into the bank and that makes the money data show faster growth. So I'm not sure that's indicative of policy necessarily.
What we are trying to do is follow the mandate that Congress gave us, and the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree, that we do see risk to inflation and we are taking those into account and we want to make sure that – that prices remain stable as possible in the United States.
PAUL: How can you do this and pursue this, the policy you have, without further weakening the dollar? There is a dollar crisis out there, and people’s money is being stolen. People who have saved, they are being robbed. I mean if you have a devaluation of the dollar at 10 percent, people have been robbed of 10 percent. But how can you pursue this policy without addressing the subject that somebody is losing their wealth because of a weaker dollar and it's going to lead to higher interest rates and a weaker economy.
BERNANKE: If somebody has their wealth in dollars and they are going to buy consumer goods in dollars – then for the typical American, then the decline in the dollar, the only effect it has on their buying power is it makes imported goods more expensive.
PAUL: Yeah. But not if you're retired and elderly, and we have CDs and they are – their cost of living is going up no matter what your CPI says, their cost of living is going up and they are hurting and that's why people in this country are very upset.
JOHN: I think the whole bit about “where you keep your money,” at one point, is where the whole argument on the part of Ben Bernanke just fell apart; right there.
JIM: It's amazing to listen to that exchange with Ron Paul and Bernanke. Paul is the only guy who gets it. And I think the markets are starting to pick up on this. And I think, John, that’s why you've been seeing gold rise, oil rise, and commodities rising. M3 in this country is growing at 15% a year. That's the reconstructed M3 as reported by John Williams at Shadow Statistics. But you know, Ron Paul referred to MZM growing at an annual rate of 20%, or nearly one trillion dollars in the last 12 months. And I think what you're seeing here that no matter what central banks are doing, I think it's starting to dawn on the smart money what's really happening to paper currencies. In fact, if you were watching the cable channels, I think there was one point, where Ron Paul was talking, that the traders in the pits there were starting to rally. Let's go to that clip if we can.
Rick: When Ron Paul was firing every revolver in Ben Bernanke's direction, there was a lot of people cheering down here with regard to the only tool the Fed ever seems to use is the easing tool; and on the inflation front, many traders are reading the subtitles and they went back and checked, he made statements like “import price with respect to the weaker dollar, it affects import prices but not domestic prices.” That's kind of an inconsistency. His performance was far from a command performance. And I’m being kind.
CNBC: It didn't look like he felt very good either, Steve. What did you hear the Chairman talking about that today?
STEVE LIESMAN: Not what Rick heard, I think.
CNBC: That's interesting. How so?
STEVE: I mean Ron Paul's economics really leave a lot to be desired. He talks people having their savings wiped out because the dollar devalued. I think Ben Bernanke, the Fed chairman, correctly points out that it is devalued if you're spending all of your money abroad. It's the domestic prices that matter. I also think Rick is wrong, that Ben Bernanke has been very consistent about the impact of the weaker dollar on the US economy. There is a portion of it where prices increase because of imports. Also export prices can adjust to reflect those higher import prices and be higher. There are impacts throughout the economy, but they are not decisive for the US economy on inflation. [17:28]
JIM: That's two guys that don't get it, Bernanke and Liesman.
JOHN: Yeah. I think Liesman doesn't get it. He had this argument about how it's only if your currency goes abroad that you're going to notice the difference between the two.
I thought: “Wait a minute. If the dollar is worth less and less and you can't buy as much, then the things you have saved for during your life, basically it's eroding the value of the currency that you have put into storage. It is stealing from people.”
So what's their problem? Frankly, Ron Paul is the only person so far that gets it.
JIM: Well, it was absolutely amazing too because Liesman was saying “look, if you buy everything in dollars...” Well, guess what, Steve, the things that you have to pay for in dollars are made overseas and if the dollar is worth less, that means we have to give them more dollars to buy those goods; that means they go up domestically as well. These guys, they really don't get it. So there was a perfect example of a well know economist and our own Federal Reserve Chairman not getting it.
And I think the problem that Bernanke has and this is really critical to playing the confidence game is if Alan Greenspan would have been up there with Ron Paul, he would have said something that would have taken you around in so many different circles. You would have been sitting there and saying like “what the heck did he just say?” And he could baffle them. Bernanke doesn't have the baffling capability and his performance just wasn't a confidence builder. And I think he's going to come under more and more fire because he just doesn't have the baffling ability that we always saw with Greenspan. [19:10]
JOHN: Well, in addition to that, I'll be honest with you, as people discover they are in more and more desperate straits, like Ron Paul talks about, and people are discovering that, they don't really care who babbles what. They just stop believing what they are hearing coming out of these lines because they just know it doesn't match the reality of their everyday lives. That's what we're hearing. They can't understand it, they can't interpret it, they don't know enough about it, but they do know they can't make the paycheck work anymore.
JIM: And they don't know what's causing it. But watch the off loading. And this is what politicians and central bankers do is Bernanke was making reference to headline inflation going up over the next couple of months but he was talking about oil prices, food prices and stuff like that. So once again we get to the three things that are often blamed for inflation. In other words, rising prices are a symptom of inflation, not the cause of inflation. And they are attributed to either greedy people trying to get profits, labor unions trying to get more in wages or acts of God like hurricanes. So right now we've got an off loading on to oil prices, rising food prices. And you hear this comment, “the Fed can't control oil prices and food prices.” Well, they can control it by creating a lot of money that expands the demand that comes from increased money and credit into the system. [20:30]
JOHN: Well, obviously, they are in a bind and they need to get themselves out. Can they do it and how?
JIM: Well, here is how the confidence game is played and you're seeing a lot of that. I call it the “good cop, bad cop” routine. On the days the dollar is going down and you have some kind of inflation report, you'll have Fed governors coming out and they will say: “That's it, we've done enough. I'm not sure we should even have cut it as much as we did, we're concerned about inflation. We're watching it very closely, we're going to keep a close eye on that.” And that's sort of like okay, we've got our eye on the ball, we're worried about inflation.
Then you have days where the good cop comes out because now they are worried about an economics statistic that shows that GM lost a ton of money. You've got banks writing off all of these loans, you've got the economy slowing down, you've got retail sales are weak, you've got more problems in the housing market and then the good cop comes out: “We're really concerned about the economy. And if we're that concerned, well, look, we’ll lower interest rates.” So it's kind of like this good cop, bad cop.
And a good example of that is Mishkin saying: “Hey, we've lowered it enough, I'm not even sure we should have lowered it as much as we have.” He's one of the bad cops. On the other hand this week, you had Poole who comes out – and he's one of the good cops – and he's trying to maintain that: “If it gets worse, we can cut further. We've got room to cut, the core rate of inflation has been heading down and inflation expectations are under control.”
So that's how they do this. They do this good cop, bad cop depending on what the market needs that particular day, wherever the public sentiment is going. [22:12]
JOHN: Right. So that's why we keep hearing different rhetoric, depending on what month we're meeting in the Fed's open mouth committee. It changes based on their barometer indicating what's going on out there, and they say they can even contradict themselves out there at some point.
JIM: Oh, sure. You can look at any week and take the statements made from various Fed governors. They are always contradicting each other. At the September FOMC meeting they were worried about a weakening economy, and inflation was not a problem; one month later they are worried about the economic growth was strong; now they are worried about rising inflation, it could be a problem; and that these two risks are evenly balanced whereas for the month before they were unbalanced. So what they are trying to do, John, is they are always trying to appeal to both sides. They are playing this sort of confidence game.
And what they are really worried about here – and Bernanke made a reference to this – is what I call the Inflation Expectations Index and that has been creeping up here. And the higher this goes this is going to make it harder for them to inflate and get away with it. The expectations index is what I call the keep-them-fooled index; and that's what they keep a close eye on because as expectations rise, then people begin to react to that and say “well, gee, the money I'm holding is going to be worth less and the things I'm going to buy are going to cost more.” So you get more turn over. People start to spend their cash because they don't want to hold it because cash is depreciating. [23:47]
JOHN: As a matter of fact, talking about that expectations, here is what Ben Bernanke said this week:
BERNANKE: The Committee projected overall in core inflation to be in a range consistent with price stability next year. Supporting this view were: Modest improvements in core inflation over the course of the year; inflation expectations that appeared reasonably well anchored; and futures quotes suggesting that investors saw food and energy crisis coming off their recent peaks next year.
But the inflation outlook was also seen as subject to important upside risks. In particular, prices of crude oil and other commodities have increased sharply in recent weeks and the foreign exchange value of the dollar had weakened. These factors were likely to increase overall inflation in the short run, and should inflation expectations become unmoored had the potential of boosting inflation in the long run as well. Weighing its projections for growth and inflation as well as the risk to those projections, the FOMC in October 31st reduced its target for the Federal funds rate an additional 25 basis point to 4 ½%.
In the Committee's judgment the cumulative easing of policy over the last two months should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in the financial markets and promote moderate growth overtime. Nonetheless, the Committee recognized that risks remain to both of its statutory objectives of maximum employment and price stability. All told it was the judgment of the FMOC that after it's action October 31st, the stance of monetary policy roughly balanced the upside risk to inflation and the downside risk to growth. [25:14]
JIM: Are you convinced, John?
JOHN: No.
JIM: Basically he was making a reference there to inflationary expectations. The higher inflationary expectations rise, the greater chance money velocity will start rising which raises the accelerating rate of inflation. And he's already made reference and everybody knows this, headline inflation has been rising as a result of the increase in the money supply that we've seen over the last 12 months whether you're looking at MZM, M1, M2, M3, which we don't report which is running around 15%. So it's already baked in the cake. They know that with all of that monetary inflation, the headline inflation numbers are up anyway because we're tracking around a CPI rate now that's about a little over 5%. That's the official number. Now, given the fact that the number itself is understated it's probably closer to 8 to 10%. In fact, if we go to John Williams Shadow Statistics, I think he has got inflation running somewhere between 6 and 7%. So inflation is already running high and what the Fed has just told us: it's going to get higher. [26:40]
JOHN: It would seem like the Fed – we've said before – is in a bind. And what they are really confronting here is they have to take into account three things, the markets and then the economy and the value of the dollar itself. And these are at war with each other right now. They are not running hand in hand.
JIM: They also have another issue that they are going to be confronting too and that's on the credit front because the commercial paper market outstanding continues to deteriorate. It stabilized roughly, John, for about a five week period after the big cut in the discount rate. But in the latest weak reported, November 6th, the commercial paper markets fell by another 15.6 billion after six weeks of basically remaining flat. And if we take a look at it since July, the commercial paper (that market is roughly about 1.9 trillion right now) is down 16% since July.
And there was another report that came out that tells us we've got more problems coming and that was the Senior Loan Officer Survey that Fed reported which showed substantial tightening, not just in the subprime market but now spreading over into the prime market. It's spreading throughout the credit markets; lending standards are tightening. And we'll get into this in the next segment because a lot of banks can't shuffle the paper. In other words, the loans that they used to be able to make –just package them and off load them on the investors – they can't do that as easily today. Any loans they are making, they are going to keep on their own books. And the one net result of that immediately is the tightening of lending standards.
This is from the Fed's October Senior Loan Officer Survey which was released on Thursday by the Fed. It confirmed that tightening in lending standards that began with sub prime mortgages has spread out. According to the Fed a significant firming is evident across most loan categories.
And just briefly going through it: For non traditional mortgages, 60% of domestic banks reported stricter requirements and that's up from 40.5% in July, and 45% in April; for subprime loans the net tightening has been reported by almost 56% of banks; a net 45% of banks reported weaker demand for non-traditional mortgages – subprime, interest-only; and 50% of the banks are reporting a drop in demand. And this has carried over into the prime market.
Do you remember, John, when they told us earlier in the year, “it's contained.” Well, as you see, it's not contained. It's starting to spread because 51% of banks reported a drop in demand for prime loans; and that's up from 10% in July.
And it's also getting over into the business side. It's not just with consumers. Lending standards have tightened considerably for commercial and industrial loans. And especially for medium to large borrowers, bank tightening has gone, from 7 ½% of banks reporting that they were tightening their standards, up to 19% at the end of the first quarter. And a lot of that had to do too with the commercial paper freezing up. So the cost of a lot of these loans has increased substantially; about 35% of domestic banks also increased the spreads from medium and large borrowers. So lending standards are increasing for the consumer in non-traditional mortgages, subprime mortgages, prime mortgages; it's increasing for businesses on commercial real estate and that's been one of the strong markets in the real estate market.
So you've got a lot of problems that it's facing on the economic front, and when the Fed sees that credit lending standards are tightening, it means that credit is going to be made less available to the economy then they know the economy is slowing down. So that's what they were sort of trying to give people a heads up. When you really think about it, John, what Bernanke was describing on Capitol Hill on Thursday was stagflation. He was basically saying “rising headline inflation and lower economic growth.” That is stagflation. [30:47]
JOHN: And where they are winding up right now is they are really fighting fires on three fronts. They are fighting fire with high voltage guard wires around it, so to speak. One is the economy versus a recession; the financial markets crashing is number two; and then the dollar really plunging. And you can tell this is one of those things like the pie plates in the air, sooner or later, one of these three pie plates is going to be crashing down on the ground.
JIM: Yeah. And I think you're already starting to see it with the response that we are getting from Canada and Europe and other central bankers on Friday is – because remember, the other central banks have not wanted to cooperate – we're going to continue to do this because there is nothing at this point that can replace the dollar. Can everybody go to the euro right now? No. Can everybody go to the yen right now? No. Are there enough other smaller currencies in the world that everybody can flee to? No. You're still going to have a dollar currency block, but what's happening is not as much money is going to be going into the dollar. It's going to be more dispersed, which is what the Chinese central bank is doing. That’s because actually if you take a look at foreign depositories at the Federal Reserve, they are still rising. So, yes, there is money that came out of this country in the month of August, but if you'll take a look at the Fed's custodial holdings for foreign central banks in September and October, that number has actually been rising. So are foreigners completely jumping out of the US? The Fed data would show otherwise. [32:20]
JOHN: So far.
JIM: So far.
JOHN: I wanted to put that caveat on there: So far.
And you're list thing to the financial sense news hour at www.financialsense.com.
FSN
Follies: Shakespeare at the Fed
The following program is made possible by a grant from the Hugo Chavez foundation and the Putin Oil Trust: Promoting energy security and independence in the Western hemisphere. Remember – you want it, but we've got it.
Welcome to Shakespeare at the Fed. In tonight's program, Shakespeare heads to the Hill to testify before the House Finance Committee.
SENATOR: Thank you for being here, I thought the responsibility of a Fed Chair was to speak in tongues, so I've been a little shocked that I actually understand you.
SHAKESPEARE: Stooping to your clemency we beg your hearing, patiently.
SENATOR: But we have, through a process of borrowing, accumulating debt and over 40% of our debt is held by foreign nations. Should we be concerned about that much debt?
SHAKESPEARE: Neither a borrower nor a lender be; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.
SENATOR: That was such a quick answer I wasn't ready for the next question.
SHAKESPEARE: Why, day is day, night night, and time is time for nothing but to waste night, day and time. Therefore, since brevity is the soul of wit and tediousness the limbs and outward flourishes, I will be brief.
SENATOR: And there is great optimism for our economy. But regrettably, some of my constituents are not feeling optimistic and I share that concern.
SHAKESPEARE: The lady doth protest too much.
SENATOR: But then you say you think it might be more than you think. I mean, if you think it might be more than you think, why didn’t you think it?
SHAKESPEARE: There is madness, yet there is method in it.
SENATOR: If our economy is depending on consumer spending, wouldn't it better if we sort of spread the wealth a little bit?
SHAKESPEARE: ‘tis true, 'tis true 'tis pity, And pity 'tis, 'tis true.
SENATOR: You're a breath of fresh air in the sense that whether I agree with you or not, at least you're speaking in English.
SHAKESPEARE: You are an ass!
Do not forget to specify what time and place shall serve that I am an ass.
Here, here.
It
Ain't Over & It's Not Behind Us
JOHN: In the first segment of the Big Picture we were talking about the fact that the old rules really aren't applying, especially when we look at how the Fed used to keep things afloat in the past. This is important to understand. Remember, we always talked about the herd always running in the wrong direction, and the people looking in the rearview mirror trying to understand a new situation with the old rules – which can basically be as damaging as not having any rules at all. So how did we actually get ourselves into this mess in the first place? Let's lay down some background.
JIM: All of these problems are caused by monetary policy. The Fed has been in an expansionary mode under the Greenspan Fed from the moment he took over the Fed in August of 1987 to the first stock market crisis that began in October of 1987. The Greenspan response to any kind of problem was to inflate, flood the markets with money, slash and lower interest rates. And this worked out fine for a while.
And during the 90s, after 1994, when the Fed really began to inflate the money supply – you can see this if you look at ate a graph of M3 before they stopped reporting – on November of 1994, they really began to crank the printing presses. Now, as we have talked on this program in our Dying of Money series, when money is created, it has to go somewhere. It has two outlets. It can go into the financial markets driving asset bubbles or go into things driving inflation in the real economy. Well, we got the good kind of inflation in the economy with the rising stock market with all of that money printing. People just thought it was a new era in the stock market as equities went up 20% a year.
But eventually you have your day of reckoning and we got that day of reckoning when the Fed began to take away the punch bowl by raising interest rates beginning in 1999. Well, what did that cause? It brought us a recession, it brought us a bear markets in stocks. The Fed typically when we get into a recession or bear market, then they go through countermoves and they start lowering interest rates. And that's exactly what they did in 2001, where they began slashing interest rates and they took the federal funds rate from 6% down to 1%. So that in effect, what we saw from the year 2000 when long term interest rates as reflected on the 10 year Treasury note were around 7%, they got all of the way down to as low as a little over 3% in June of 2003. And as a result of that, as interest rates came down, the next bubble or malinvestment in the economy began in the real estate market. [37:58]
JOHN: So what this basically did was sort of kick off a buying spree in the housing market because people were now able to go out and buy larger homes or get into homes where they had never been able to do that before and that was something we'd never seen before. It created quite a bubble in this whole housing area. It was actually a euphoria.
JIM: Yeah. And there were two problems that were responsible for the mess that we're in today. One deals with the buying of homes themselves. In other words, rather than telling people, “wow, you're going to be taking on a half a million dollars of debt to buy this home,” the way real estate began to be sold was with the concept of “what would your monthly payment buy.” And instead of saying you're taking on this kind of debt, it says, like, what can your budget have?
Let's say for illustration purposes, let's say that all I can spend on housing a month is $1000. I'm going to do this just to make it easy to illustrate. If interest rates had not been brought down, and let's say they stayed high, a thousand dollars a month at an 8% mortgage rate would only be able to support a $150,000 mortgage. At a 7% interest rate, it would be able to support $170,000 mortgage. But what happened, John, as we brought interest rates down to 3%, people were going out and getting these creative financing where they would have these teaser rates for let's say a variable rate mortgage – when you had the federal funds rate at 1% you were getting teaser rates at 2 ½%. So a thousand dollars a month at a 3% rate would be able to support a $400,000 mortgage versus an 8% interest rate which would only be able to support a $150,000 mortgage.
So as interest rates came down, a bigger house was sold to the public and the public were thinking of “my thousand dollars can buy me a $400,000 house versus a $150,000 house.” And what they weren't thinking of is with all of these variable rate that's went into effect, what happens when your teaser rate of 3% gets reset at 5 or 6%; and what happens when the real estate market goes down?
So the problem that we have today with this concept of variable rate interest rates, and what your thousand dollars would buy you in terms of what kind of mortgage it would support, is that people weren't thinking of the price of real estate going down because for decade after decade real estate did nothing but go up; except for periodically you get these downturns. So they weren't thinking about what happens if real estate prices don't go up and what happens if interest rates go up. That’s because remember, even before the Fed began raising interest rates, you had people like the Fed Chairman Alan Greenspan encouraging people to go out and take variable rate mortgages which is exactly what they did. So that was problem number one. [41:26]
JOHN: In addition to people who got into homes say for example to live in them, then you started the speculative frenzy as well, people went out and started house flipping, so that drove this thing on even further. And then compounding on top of that then, it became just doggone easy to get a loan, especially with no-doc loans and everything connected with that whole process. So that's what drove this thing to the next stage.
JIM: Sure. And the next stage is what we're dealing with now which is the securitization of mortgage debt, or installment debt, or credit card debt. Because as interest rates began to rise in 2004, 2005 and 06, in order to keep the game in real estate going banks then began to get more creative. They got into interest-only loans, they got into negative amortization loans, they got into the teaser loans, they got into no-documentation loans. Imagine, John, a banker – and I have a friend who is in the banking business and the stories he has told me of no-doc loans. I think we’ve talked about them on the air, somebody coming in and saying, “yeah, I sing for the church choir and I'm making 100 Grand a year.” How believable is that?
And the reason that these loose lending standards came into being is because banks were no longer responsible for the loans they were making. Basically it became a manufacturing mill for credit: The more loans they could make and process and repackage the more fee income they would take on. And what happened is instead of the banks having to worry about “hey, we're making a lousy loan and if we keep this on our books we could lose money there,” they weren't worried about that because they were passing on the risk – the securitization – onto somebody else. So you had two combinations here. You had a misrepresentation, in my opinion, on how debt was sold to finance these houses because nobody was saying: “Look, yeah, your thousand dollar payment will buy you a 400,000 dollar mortgage. That's only good for about a year or two and two or three years from now. You might want to think about what happens if from rates go from 3% to five, six, seven percent, will you be able to afford this?” That's not the way it was sold. The amount of debt that a consumer has taken on wasn't the way it was packaged or sold to an individual. It was sold simply with a thousand dollar payment, this is how much house you can buy. So that was the one problem.
The second problem was banks were just going through this like a – almost a manufacturing machine or printing press and just recycling these loans, pushing them out the door, securitizing them, packaging them, selling them to Wall Street. They were sliced, diced to all of these things we know as collateralized debt obligations (CDOs) or SIVs. And it became a money making machine where like the Structured Investment Vehicles they can go into the money markets like the commercial paper market, borrow money at a low rate and turn around and buy these mortgages at a higher rate.
It was almost like a perpetual carry trade that was carried on through the entire economy. And so now that's where we are; we've packaged this massive amount of debt. And now, as Bernanke testified the other day, for every quarter going forward well into the end of next year, 450,000 mortgages are going to be reset. And a lot of these mortgages, John, were taken out initially at this 3 and 4% interest rate which would enable a person for $1000 to support a much higher mortgage. They are not going to be able to support that higher mortgage as these mortgages have to be reset. So now, we've got two problems that are facing the consumer: The mortgages are going to get reset, they are going to be at a higher interest rate. And at the same time, the banking industry which now since the CDO market, much of the mortgage market securitization has come to an end. Any loans they are going to have to make, they are going to have to keep on their own books so lending standards have tightened. So you have two things they are working against a lot these mortgage resets. Higher interest rates and tougher lending standards. [45:50]
JOHN: So what you're telling me is this thing is not over yet despite comforting words.
JIM: No. And I’m trying to think was it three or four weeks ago we talked and did a show about when this is all said and done you're going to probably have about 300 billion in losses that are going to have to be written off. And we're just getting started here. And the latest figures are going to be anywhere from 300 to 500 billion – half a trillion – in losses. So you know, remember, John, when they were talking about this is all contained, that it's all just “the brush fire has been contained it's just in the sub prime market.” No. It's in the Alt-A market. It's even moving over into the prime market. And as a result of that, you're going to see a lot more write downs; and these write downs are going to be carried forward well into next year as these mortgages are reset. And so this is just getting started. It's moving it's way through the brokerage system, it's moving it's way through the big money center banks. It's moved its way through the intermediaries and it's just beginning. It's going to get worse. [46:57]
JOHN: So first of all we know the mortgages are going to reset, banks will not be able to off load these. They are going to have to hang on to these packages, so this is going to create another round of defaults etc. But remember back in 2005 – and we talked about this on this program several times about them taking a safety valve and a very bad situation on a boiler and closing the safety valve. Remember they put into the bankruptcy bill that people can't walk away from their debt anymore. They’ve tangled people up in this. And I'm predicting sooner or later the clamor to undo this bill is going to be there. But isn't that another factor in this whole continuing?
JIM: Sure, because with the bankruptcy bill that was passed in 2005, consumers couldn't file Chapter 7 and cleanse the debts, and so they could only file Chapter 13. So what the new bankruptcy law actually did help to do is drive foreclosure to a record as homeowners default on mortgages and struggle to pay their credit card debts. So what cash strapped consumers are doing now is they are saying: “I can't walk away from my credit card and I need those, but I can walk away from this house.” And so this bankruptcy bill is coming back to haunt a lot of these banks. In fact, many of them have been reporting that here's one thing to watch for is delinquency in credit cards with payments more than 30 days late. We're already starting to see some recognition of this thing happening.
So you're right: What's happening right now, people are putting their credit card payments ahead of their mortgages. You take a look at companies like Capital One, the largest independent credit card issuer, its customers are at least 3 months late on their mortgage payments; 70% are current on their credit cards. So they are late on their mortgage payment, but they are making their credit card payments. What they are doing is they are paying the ones they have to pay. [48:50]
JOHN: Some banks are – the big banks, the big money center banks are snooping on their customers lives. I don't think people know this that, depending on the bank that you're with, they will most likely be checking your credit score almost daily to see what's going on in your account. And some people have their account slammed shut suddenly and they can't figure out why. It's because the bank is trying to determine risk in there. But other banks you can see where that would work quite feasibly because of the fact that the bank isn't checking every day. They don't care. If it's a different bank than the one that floats your mortgage so to speak then they don't care whether your mortgage payment is late as long as they get your credit card payment. You could see how that would work.
JIM: And as a result, we're seeing this reflected in personal bankruptcies which were up 48% in the first half of 2007 from the year earlier and chapter 13 filings accounted for more than one third of those bankruptcies. So what is happening here is you've got to make a choice. Well, if you purchased a house and you put no money down it's much easier to walk away from that mortgage and that house. And that's exactly what you're seeing; the consumer is saying: “Wait a minute, I have no equity in this house but I still need my credit card, so I'll make my credit card payment, they can have the house back.” And that's what a lot of consumers are choosing to do. [50:07]
JOHN: Because I have nothing in the house so I'm not walking away from anything.
JIM: Yeah. And I'm going to have to be forced to even if I file Chapter 13 – I'm going to have to be forced to make some kind of payment on whatever I've charged or put on my credit card. So it's a whole combination of circumstances which are here, but this thing isn't over. [50:31]
JOHN: Well, I'm still going to stand by my prediction here from three years ago that once the fertilizer hits the air conditioner – if you notice it’s splattering all over the place right now – once the fertilizer hit the air conditioner, there was going to be a clamor before Congress to pull that back.
JIM: They are already in the process. I think there is a bill trying to work its way through the House that the House Judiciary Committee is working on a new bill to unwind that 2005 bankruptcy bill because it's just blowing up. So it was great for the banks during good times, but it's not going to survive in tougher times. [51:02]
JOHN: No. I can see that one coming real fast. Anyway, transparency – and I think transparency is an issue here too that we haven't touched on enough.
JIM: Yeah. There is something else that I think we're going to get hit with. There is an FASB (the Financial Accounting Standard Board) Rule 157, and it's going to make it harder for companies to avoid putting market prices on securities considered hardest to value. And this is really going to affect the markets because basically, John, we've got three tiers of assets. Under the FASB terminology, you have Level 1, which means mark to market. That means if you bought, let's say, a mortgage security for a dollar and its market value –if it's known – is 80 cents, you've got to mark it down to 80 cents because that is what it is. That's level one.
Level 2 is mark to model where you have maybe a complex security like an over-the-counter derivative that is quite complex and what you're going to do is valuing it based on some kind of modeling input. And there is a lot of this stuff out there – especially with hedge funds, pension funds, and with other institutions – where they are holding assets on the book and they are modeling the value of those assets based on some computerized model.
And then you also have something called Level 3, which is based on “unobservable inputs reflecting companies own assumptions.” Imagine that! “Well, we don't have a model, but I believe the value of this asset is exactly what I say it is, which is a dollar.”
And so what's going to happen is if they have to start marking these assets, let's say that up an asset on your books and it's a level two asset and you're pricing it exactly what you paid for it, but now you have a similar type asset, let's say in the ABX where it's priced at 60 cents, 30 cents or 40 cents. That's exactly what you're going to have to do. So you're going to see a lot more writedowns as a result of this FASB rule when the new rule goes into effect November 15th. And when it's all said and done, you can see, John, probably another couple of hundred billion dollars of assets that are going to have to be written down here as a result of this new accounting rule, because what it's going to do is make it more difficult to keep these assets and keep this market opaque as it has been where people are saying “we really don't know what this stuff is really worth.” And you really don't until you turn around and try to sell it to somebody. And you may be carrying it on your books at a dollar, but when you have to price it in a market that is now more risk conscious as our market is today, you may only get 20 currents on the dollar, 30 cents on the dollar. So you're looking for a lot more write downs coming our way. [54:06]
JOHN: Is this where we call in Bruce Willis because it's Armageddon, or are we going to be able to float in thing upward and keep disaster from finally striking planet earth?
JIM: No. I don't think this is the Armageddon yet. I do think as we pointed out these losses are going to be somewhere in the neighborhood of 300, but I think originally we were looking at 200 to 300 billion. But if they come up as this new FASB rule 157 is implemented you may see probably an extra couple of hundred. So it could get as high as maybe 500 billion on the high end of losses. But you've got to put that into perspective to the total size of the mortgage market; and you have to put that into perspective to the total size and amount of liquidity out there.
But let me put it this way, the headlines as these losses are written off, we're going to see some Maalox and nail biting moments in the market. And it's just going to create more and more volatility. It's going to be very similar to the S&L crisis that we saw in 90 and 91 as Savings and Loans were going under. But look for them to repackage them, to reprice them; there are already venture pools that are raising vast amounts of capital that are salivating at the idea of going out and buying an asset for 20 cents on the dollar. So it's not the end but it is going to get worse and it's not over. [55:30]
Which
comes first? Peak Oil or Global Warming?
JOHN: www.financialsense.com. Time to move on to the next issue because this is going to focus on whether or not our wonderful Congress critters are running in the wrong direction. Just when everybody's been running around pronouncing the debate about global warming to be closed...And remember we're talking about four issues here on global warming: number one, is there global warming; number two, is it within historical norms; number three, if it's not within historical norms, is mankind responsible for it; and number four, even if we are responsible for it, will Kyoto do anything – and bear in mind in November they are going to be meeting in Bali to try to resurrect Kyoto 2 because most of the countries of the world are not meeting their targets.
...But just when this debate has been pronounced over, founder of the Weather Channel John Coleman came out and said that global warming will ultimately turn out to be the greatest scam in history. In a couple of decades we'll look backwards...
But we're not going to engage in that debate here. What we're going to look at is the whole issue of which comes first, global warming or peak oil? How are we going to tackle both of these, are they wise or unwise? Taxes, credits, incentives or penalties. I guess we've opened the field there, Jim. Where do we jump in?
JIM: We've been talking about that rising oil prices, peak oil here, John, for, gosh, how long have you and I been doing this show? Six years now?
JOHN: Something like that.
JIM: Probably going on seven. And we've been talking about peak oil, one of the reasons behind this. And every time oil has climbed up the ladder in price, when it went from 20 to 30, I remember I had Jimmy Rogers on my program. He had just gotten back from going around the world and he wrote his book and he said, “I don't think you'll ever see $25 oil again in your life time.” And he was absolutely correct. Oil went on beyond 30 and when Rogers said that, by the way, it was somewhere between 20 – I think it was 28 to $30. It went beyond 30 and then in 2003, it went up to 40 and of course everybody was saying it was the Iraq war premium. There is ten dollars in the price of oil and when the war is over oil will come back down, which is what it did during the first Gulf war.
And then, you know, well, the war was over and it continued to go up. And then all of a sudden they said, “well, it's speculators and hedge funds, they are adding 10, $20 to the price of oil. Then it went through 40. And you remember, John, when it went from 40 to 50 they were talking about, well, the dollar – the fundamentals argue against it and the Fed is now – this was like in 2004 when we moved above $40 and they were talking...And remember, the Fed started to raise interest rates and in 2004, it got almost to $60 a barrel and the Fed began it's interest rate hikes...And they talked about how this is going to slow the economy down; it is going to stop demand.
And there was also the China scare in 2004; that the Chinese economic growth was going to slow down; therefore less demand for energy. So they gave us the economic reasons, so they were blaming the premium on something.
Then in 2005, we get to $70 a barrel, especially during the summer of that year during the hurricanes in the end of August and September. And then they said that's weather-related. So the price of oil came down and then in 2006 we had a correction, it went back up, touched roughly around $75 a barrel; and then remember, the Fed is still raising interest rates in 2006. And they said eventually economic growth will slow down.
The point we're making here is since 2001, we have one series of – you know, you always hear about, well, it's the war premium, it's the terrorist premium, it's the speculator premium, it's the dollar premium. The fact is, John, it keeps going up. So you can talk about all of the premiums. I heard somebody say, “well, there is probably a speculator premium of about $30 in the price of oil that the intrinsic value of oil right now should be around 55, $60 a barrel. [4:25]
JOHN: The question would probably be whether or not this is a speculative issue or simply just something of demand really just outstripping supply; which does happen?
JIM: More than anything else in plain, simple economics, if you take a look at the demand growth between the US and China, over the last decade and a half, that alone, just in the increase in demand coming from just the US and China, that has added 7 million barrel per day in terms of consumption. And we've had all of these assumptions. And Matt Simmons talks a lot about them. In fact, I just want to let our listeners know, Matt will be a guest of mine next week in Other Voices.
But in the 90s we said it was the modern economy didn't consume much oil, oil demand had peaked. And then we had the Peso crisis 94, the Asian crisis in 97, Long Term Capital Management in 98; and that was going to kill demand. And we actually had oil prices down to $10 a barrel. And then we had the recession and events of 9/11. The fact is between all of these periods of time where we were making these assumptions about demand growth, demand globally from 1995 to 2007 grew by 16 million barrels a day. And if you take a look at the fourth quarter of this year, oil demand is projected to reach another all time record. So demand has not dropped as the experts have been telling us for nearly two decades. [6:04]
JOHN: Okay. Then what is driving global oil demand? Obviously there are several different factors involved.
JIM: Plain and simple, it's economic growth. The one factor that we're contending with today that we didn't contend with two decades ago are the industrialization of China, India and the developing world. And those industrialized economies, where a lot of the manufacturing takes place, are more energy intensive per dollar of GDP than more service-oriented or financial-based economies such as the United States. And so it is economic growth. And especially coming from countries like China and India, which are becoming the new economic power houses that are driving this demand. So it's economic growth. And despite the fact that, yes, we use less oil in the United States per dollar of GDP, I mean a lot of our GDP is fluff stuff, it's wedding planners – no offence against wedding planners. [7:07]
JOHN: Talk show hosts, things like that. People that don't contribute anything useful in to the economy; right?
JIM: Yeah. But in a service-based economy, we're consuming less energy per dollar of GDP. But the fact is our economy, service-based as it is, has gotten larger. And the US today is consuming more oil today than it did five years ago, 10 years ago or two decades ago. So despite less use for GDP, we are still consuming more of this stuff. [7:34]
JOHN: That's an increase in demand, not to mention internal usage by various countries, even producing countries. What about the supply of oil; are we hanging in there? If we just dug a little harder, would we find more? What?
JIM: That's the other side of the equation, John, and that's where the problem lies. Non-OPEC supply had basically flattened out; the large spare capacity in OPEC has narrowed considerably and it's now somewhere around two million barrels. And crude oil growth fell behind petroleum demand. I mean oil companies – the majors, the national oil companies – have simply not been able to increase oil output at a fast enough rate to keep oil demand. And then something that we have pointed out on this program, what most people don't realize, not only is OPEC not able to increase –and we only have a couple of countries within OPEC that do have the ability to increase production – but they are also consuming more because within OPEC countries, they are subsidizing oil. Whether it's Venezuela, Saudi Arabia or Iran, they are basically consuming more of the product that they produce. So the more that they consume and if they are not able to increase commensurately with that consumption, the less they are going to have to export. So a lot of what might be excess surplus is also being cut back by the fact of their own increase and their own domestic consumption. [9:07]
JOHN: Obviously, we have a collision coming here because if oil demand continues to flow and oil supply is not increasing, then this is a point of – not a point of no return, but it's obviously a situation that gets worse and worse as time goes on.
JIM: Sure. And I think that's why as Matt Simmons and others in the peak oil camp have been saying, the wolf is at the front door, and peak oil is a serious issue. And what we're doing to make up for what has happened that we're not able to meet this demand – we normally get a very strong increase in the fourth quarter as the weather changes and gets colder – is we're liquidating our oil stocks; we're dipping into our supply of oil in storage to make up the short fall. And you know what? You can't do that for ever or do it for long. I mean, it will get you through a winter and maybe keep a lid on prices, but you don't think traders and analysts are taking a look? I mean smart people are watching that and saying “wait a minute, here is OPEC production, here is non-OPEC production, here is demand and demand is higher than supply, so supply is not meeting demand and we're drawing down our stock.” We have a problem here and that's the market’s way. That, I think, is the real reason that we're seeing oil prices where they are. And if you look at the Energy Information Agency itself, conventional crude oil production peaked in May of 2005. And it's gone down since that, so that's where I think we are right now. [10:47]
JOHN: But the other side of the argument, and I've been wanting to bring this one up, is the global endowment. “If we just explored more new technology would come on board, there really are big caches of oil that we're not exploiting,” yada yada yada. How does that factor into the equation?
JIM: Let's take some of those arguments and this gets back to the reserve idea. The Canadian oil sands are expected to have an oil endowment somewhere around 160 million barrels of oil. But John, the Canadian oil sands, they are not going to be producing 10, 15 million barrels of oil a day. Maybe by the middle of next decade they are going to get up to 3 million barrels of oil a day. So they always make a mistake. They take the total number of reserves, take the current production rate and say we'll just divide that into it, we've got more. The argument just doesn't hold up. Yeah. We've got a lot of potential oil but whether the Canadian oil sands will ever go beyond three, five, or maybe five or six million barrels a day is a debatable issue because it's very expensive oil to produce. It is also energy intensive to produce so it uses a lot more energy inputs in its production.
And then as far as the price issue of if high prices go up, it will unlock more oil supply. Well, folks, the price of oil has been going up since 2001 where it was at 18 to $20 a barrel and we're at 96. And you would certainly think a four-and-a-half fold increase in the price of oil, if you buy the economists’ argument higher prices will bring more supply – it hasn't. We're talking almost $100 oil. Where are the major oil discoveries? Where are the new North Seas, the new North Slopes, where are the Ghawars, where are the Cantarells, where are all of this major oil that's supposed to be out there that's supposed to come online? Though there was a state-owned oil company this week that made a major discovery off the shores of Brazil which will add to the reserves. But it's not a North Sea, it's not a North Slope. So prices have risen, but we haven't seen a commensurate increase in supply. [12:57]
JOHN: What about infrastructure? How would that factor into this whole thing? For example, say the Gulf of Mexico turned into a giant vat of oil? Could we use it?
JIM: First of all, we don't have the facilities to process it. We have the capability, I think the figure is somewhere around 17 ½ million barrels. The fact that we haven't built a refinery since the 70s, that's another issue in terms of oil security that we don't talk about. It's not just the fact that we're importing oil, it's not just the fact we're importing natural gas, we're also having to import more finished products because as our demand for finished oil products increase – for gasoline, diesel, jet fuel – we do not have the capacity to produce it or refine it. So not only do we have to import the raw stuff, we also have to import more and more each year of the finished stuff.
And our pipelines – we don't have enough pipeline to carry for example natural gas; we don't have enough refineries to refine the type of oil. And especially now, a lot of the excess oil that's being pumped out which is the sour crude instead of the light sweet crude which a lot of refineries were designed to process. So we have less of that. We also have even some of the oil platforms out in the Gulf and some of the oil infrastructure itself is aging, John. We have refineries in this country that are 50 to 70 years old. And when you get old, stuff starts to break down. And we're putting increasing demands on these refineries to run at hotter levels to process the new fuel requirements of the new refined gasoline with less sulfur. So there is all kinds of stuff that we're doing here. The point is where is this coming from?
Energy is a very, very expensive process. Finding oil – we mentioned that finding oil has gone up by almost 26%; lifting oil has gone up 31%. This is just in the last year. And the cost of getting this stuff becomes more expensive and as those costs go up, you're going to have people that are going to say: “You know what? We can't afford to produce unless we get $80 or $90 and are afforded a profit.”
So despite all of this, John, where is the beef? Where is all of this excess supply they are talking about? Where are all of the new discoveries that they are talking about. And, yes, we have new fields that are coming online, but the one thing that they fail to talk about is the number of fields that are declining and at a very, very rapid rate all around the world. And the number of countries that have reached peak oil and are now into decline. So Matt Simmons has said it, and I think he said it last year, didn't he? he made a repeat prediction on our show and he said within the next 12 to 18 months peak oil will overshadow global warming as the number one single topic of importance. In other words, the whole political spectrum is going to change.
And you would have thought, as we approached $100 oil, our politicians and those running for president would be talking about it other than just giving the lip service about it. But you know what, John, I don't know what that figure is going to be. Maybe it's going to be 125, 150 or 160. I certainly think that as the price stays up here and continues to go higher, that as gasoline goes to $4, $5, eventually $7 and $9 – I have people that tell me in Europe they are paying $9, of course part of that is taxes, but – as that price goes up, it will overshadow the global warming debate. [16:38]
JOHN: I tend to think that if global warming does not manage to merge itself into the issue of oil, then it's really going to subside quite a bit. You're going to see that. I said that a couple of years ago and I'm still standing by that. If they do succeed in reframing the global warming issue in terms of energy policy rather than oil, then there is a chance it may keep on going. Other than that, like I said, they'll take it to the side of the ship and throw it off.
JIM: Yeah. But if you take a look at it, global warming pales in comparison to the immediate devastation or impact of peak oil. I remember, I think it was Robert Hirsch’s report that was issued; he was commissioned by the government in 2005 and he looked at peak oil and he said it's coming. He said whether it's 2015, 2010, 2020, 2030 – there is a debate there because it could be forestalled through economic contraction or some of these alternatives. I mean the reason we've been able to increase output since May of 2005 when conventional oil peaked is because we've been able to use coal-to-liquids, gas-to-liquids, ethanol, biofuels; and that's what's making up the difference. You've got global demand in the fourth quarter, which will be over 87 million barrels a day and, you know, conventional oils only producing around 75; so another ten million barrels a day is coming from all of these other sources.
But anyway, getting back to the Hirsch Report, he said, “peak oil is coming. And the best alternative would be if you take steps and plan for it 20 years before it occurs.” And he goes on, if that is done –you conserve, you get better gas mileage, you go to mass transit, you start using thing to conserve and then start coming up with alternatives – we can get through this painlessly.
He said the second best scenario is that maybe it becomes conscious 10 years before it occurs. You're going to have some difficulties because changing the whole energy infrastructure cannot be done over night. He said the nightmare scenario is if it is immediate. And that is the question right now because conventional oil production peaked in May of 2005, and these alternatives are what has been making up the difference since then. So as Matt likes to say, if the wolf is inside the door or the elephant is inside the living room, we've got a problem here. [19:15]
JOHN: How soon can we expect this, because the IEA was saying by 2012, by the end of 2012, we were going to be smack in the middle of this bottleneck problem that we have. In other words, you can't ramp up fast enough. What are the chances we're going to smack into it and what are the chances we're going to dodge the bullet?
JIM: I don't think we're going to dodge it. And their crisis window (and this is the very same crisis window we've been talking about on the program) opens up in 2009 to 2012. We do have more biofuel plants coming on stream, we do have some new oil fields coming on stream. We have coal-to-liquids, gas-to-liquids. That is still coming on stream and that's what's kind of getting us through this pinch. But the other thing is we're draining our oil stocks –our inventory in the warehouse – to make up these shortfalls. And so maybe we can draw on inventories over the next 12, 15 months to sort of get us through. But I think the oil markets are already sensing that as we sit here on this Friday where WTI crude closed at 96.32 in the futures market and Brent crude closed at $93.18. And you know, John, we haven't really got to some real cold weather yet. [20:41]
JOHN: Just trying to plumb out whether or not it's really going to make the dive in the crisis window. I'd like to think not, but unfortunately I think it's heading in that direction.
JIM: I know it's heading in that direction because right now the way we're getting through this is we're drawing down our oil stocks and we’re looking at $96 oil. What happens when our oil stocks really begin to deplete and they are not replenished and as demand continues and the price goes over 100. I suspect, John, if we're over 100, $125 one of the reasons that the price at the pump has not caught up as quickly is a lot of refiners have been burning off and using their older inventory; that's one reason we've seen some stocks decline. And as they use up some of the older inventory which was bought at an older price, that's reflected in the blended rate between what they have to buy at a new higher price in terms of what we're paying at the pump. And as the prices stay up at this level, we're not too far away from going over $4. I don't know what it's going to take. Maybe it's $5 here, $6. I would have thought it would have been $3, because if you take a look at where we've gone, we've basically doubled the price of gasoline. But as a percentage of most American's income it's a smaller percentage today. So I think that probably I would suspect when you get close to five dollars or six dollars people are going to start saying “Ouch!” [22:11]
JOHN: Yeah, and it depends on how far you've got to drive every day as to how bad the ouch is going to be.
JIM: I suspect by the time we get to November of 2008 that I think oil will become more of a dominant issue in the presidential campaign.
JOHN: On an increasing frequency. In other words, we'll actually have it in the presidential campaign. But then as this crisis window opens up, you are going to see it become more and more of a Capitol topic. I still believe whoever sits in the next Congress and whoever sits in the White House is going to be presiding over an incredibly turbulent period coming at them from a half dozen different sources. I really believe a lot of things that they are talking about that right now under the presidential debates – aside from the fact that I think the inmates are running the institution – is the fact that those will just be shelved. People will be so busy dealing with alligators, there won't be time to push a lot of those agendas.
JIM: Yeah. I would say by the time we get to next summer, when both parties choose their candidates for the presidency and we get into the fall election campaign, that energy is going to be one of the dominant issues. And I really believe and this is one of the questions I'm going to ask Matt Simmons, who will be a guest on this program next week. And I'm going to talk to Matt and say, “Matt, what is the likelihood that energy becomes the number one issue in the political campaign as we head into November of 2008?” [23:26]
JOHN: So basically by the time that oil gets to, he says, $150, $160 dollar oil, like I said, you're going to see the global warming debate will come screeching to a halt; or any action on it will come screeching to a halt because the economy will be crippled enough that also – as people will see from our guest on Other Voices coming here shortly – people are going to realize what the costs of these caps and credits and trades and other things are going to be related. And by that time it's either going to successfully merge in or be forgotten. That's where it's going to be at that point. www.financialsense.com. Coming up: Other Voices.
Other
Voices: William Kovacs, VP of Environment, Technology and Regulatory
Affairs
JIM: One of the worse things that can happen to all of us as citizens in this fair land is when Congress is in session because that's when they enact bills, some good, some bad. We're here to talk about one that doesn't look so good. Joining me on the program is Bill Kovacs, he’s Vice-President of Environment, Technology and Regulatory Affairs for the US Chamber of Commerce.
And Bill, Congress just passed a bill, the Leiberman-Warner Global Warming Bill. Why don't you take us through it and what are some of the issues that the Chamber of Commerce finds wrong with this?
WILLIAM KOVACS: Sure. Well, first of all, they just passed it out of subcommittee, but it's expected to go to committee next week. The essence of the bill is to, over a period of 40 years, begin regulating how the economy is going to reduce emissions of CO2. So what they do is set a limit as to the amount of CO2 that can be released into the atmosphere; and every year it's got to be less. And CO2 generally comes from fossil fuels – coal, oil and gas. Unfortunately what the bill doesn't do is it doesn't have any emphasis on technology. So as you begin putting more and more restrictions on the energy that can be used, you need more energy to come into the marketplace in the form of non-fossil fuels. And that presently doesn't exist. And so how they handle it is that it's literally the old style 5 year, 10 year, 15 year planning that we used to ridicule back in the 50s when the old Soviet empire used to have these long term planning process. Only, this is a 40 year planning process.
And they then allocate which segments of society are going to have the ability to use energy. For example, they give some of the credits to the Climate Change Credit Corporation. Others are given to companies who have already reduced credits and then they give some to Indian tribes and states they give some to poor people because they won't be able to pay their energy bills. They give some to the Secretary of Agriculture for forestry projects; and then they give some to the electric utility industry and the manufacturing industry. So it's literally a planning process over a 40 year time period. They are not mandating or using technology that doesn't exist.
And the financial one, I guess, the impact – they had some economic witnesses today testifying the impact is going to range somewhere from a tax on a family of about $1000 to about $3500 depending on what the price of carbon is. It's going to have a direct impact by 2015 of about $160 billion to $250 billion loss to the GDP. And going out to 2040, which is where the final part of the planning process ends, it's going to have a negative drag on the economy by about $800 billion to a trillion dollars. [27:23]
JIM: Is there anything in this bill that addresses okay, if we're trying to clean up CO2 – and it sounds to me like central planning in the Soviet Union – what about China, India? And isn't this a little bit more radical than even the cap-and-trade system that's currently being proposed or used in Europe?
BILL: It’s much more radical. But you hit the key point what about China and India. If you were going to ask us what is the biggest problem with the bill is that it's only a domestic bill. And even the increase of omissions from the developing world is so great that if you shut down the entire United States – just pretend you wiped us off of the map – in seven years the increase in emissions from the developing world would equal all of the emissions that the United States currently generates. And no matter what we do in the United States, no matter how much economic harm this bill would inflict, the emissions of CO2 will still increase worldwide. [28:24]
JIM: And there are even some individuals, a lot of scientists that are even questioning the validity. I mean, you and I emit CO2 emissions when we breathe, so I guess we could probably stop breathing.
BILL: If you looked at just the world and you ask how much CO2 is in the world, I think the numbers are roughly on an annual basis about 207 billion tons; and of that about 7 billion tons is attributed to humans. The rest is naturally occurring. [28:57]
JIM: You know, Bill, one of things we’ve heard lots of talks about global warming, the damages it may or may not cause 30 or 40 years from now, but what this bill is going to do in the next four to five years, this is going to bring home on a real time basis to most families the real cost of implementing this; because as you mentioned, the costs are going to go up in energy in terms of a 100 to what, $3500 per family?
BILL: That's correct. And that's every year.
JIM: That's every year?
BILL: That's every year. The other day when Alan Greenspan's book came out, The Age of Turbulence, the quote I like to just read is:
There is no effective way to meaningfully reduce emissions without negatively impacting a large part of an economy. Net, it is a tax. Jobs will be lost, real incomes of workers will be constrained and the cap-and-trade system is to be popular only until real people find out that there are real job losses as a consequence.
So Greenspan says once you know what the cost is, you're already going to lose your job. [30:01]
JIM: It’s absolutely amazing because the day you and I speaking we're looking at oil at $95 a barrel, so sooner or later these high oil prices are going to catch up with most consumers when they go to the pump. But what this bill is going to do is drive that cost up even more. They are going to be looking at their utility costs, and other things, and it's not just their utilities, because when companies are charged all of this extra money that they are going to have to expend to do business, that's going to be passed on to consumers in the form of higher costs.
BILL: You're absolutely right. Yesterday, in the Washington Post there was an MIT economist who said at the time the cost of coal could quadruple and the cost of crude oil could rise by an additional $24 a barrel. So you're looking at what is in effect a direct energy tax at a time when energy prices are the highest they've ever been. And the point that I think we all need to be conscious of as we ratchet up energy prices is if it's a market economy and everyone is paying for the same price for energy, you can compete. But when everyone is paying a high price for energy and we're making it higher, that puts all of our domestic industry at a complete competitive disadvantage with the rest of the international community. And if we’re paying 25% more than they are for energy, we're having a hard enough time competing in the world today, that will only make it more difficult. We'll only lose more jobs. [31:32]
JIM: Has business had any input or any say so, saying: “Look, guys, this is going to be the economic consequence if you do this. This is what it's going to cost families on an annual basis. This is what it might mean for jobs, this is what it might mean for America's competitiveness.” As you just mentioned, we're having a hard enough time competing. This is just going to make it even worse. Has there been any input or are they even listening?
BILL: At this point, the real debate is just beginning. The climate change debate has been around for a decade. No one took it seriously because, frankly, when the Republicans were in charge they looked at much more of the economics of the situation and the impact on job growth. The Democrats, really because of their constituent groups which are the environmental groups, they are looking at how do we fundamentally change society so we get off our heavy use of energy. So they are looking and they talk about this – even Senator Lieberman –they all admit in his opening statements it's going to cost hundreds of billions of dollars. He's recognizing that. We're saying it's probably going to be trillions but they are all recognizing this is going to be a wholesale transformation of the nation's economy, because once you start down this path and you start every year to restrict the amount of energy that you're going to use and you've got to restrict energy because there is no other energy coming into the system in the quantities that can make up for what it is you're going to require to be taken out, you are going to transform how you learn to operate a society. You're going to transform how you're going to heat your house, what temperature it's going to be at, how you're going to drive your car, whether you're going to have the luxury of having an extra car because these are all going to be direct expenses that are going to go right down to the bottom line. And again, it's the Washington politicians deciding here’s our 40 year plan as to how the United States is going to live for the next 40 years.
And all I can say is anyone who has been to Europe recently, they don't build new houses with air-conditioning. Now, maybe people in the United States don't care. When I was there a few weeks ago, I had two electrical outlets in my hotel room and when I had the lights on and I needed to charge my Blackberry, I literally had to unplug my reading light so I could plug in my Blackberry. Now, if that’s how the American public wants to live, that's fine. That's their decision. But we’ve spent three trillion dollars in the last 30 years on environmental protection, the business community has. We have some of the cleanest air, and water and land in the world. We've got an energy intensity rate that is equal to the best countries in Europe and we are reducing CO2s. There is no other technology to do it any other way. So if we had it, we'd use it. And so what the Congress is doing is that the Washington politicians are saying we know how you should live, and we're going to plan your economy for 40 years and we're going to tell you every year how much energy your economy is going to use. And that's really a crap shoot. [34:37]
JIM: Listen, if our listeners would like to find out more about this bill, what would you recommend, contact their congressman, express concern or what would you like to see?
BILL: I guess two things. I would always say contact your member of Congress and contact your Senator, and we're going to be writing some viral internet ads in the next couple of days which I think will be pretty funny and people will get a real sense. But the Congress right now has really decided that the leadership of the Democratic Congress has really decided they want to push this issue to the floor. So contacting your members of Congress and saying no, I think that's great. I'm not sure the Washington politicians are listening to the people. It's more important for people in the communities to talk to their friends and to start talking about: is this what we want to live? Do we want to live in a central planning regime or do we want to try to invest in the technology, own the intellectual property with the technology and then deploy it all over the world? Because at the end of the day, it's still cheaper to take CO2 emissions out of China because it's cheaper to do it. They are putting up one new coal-fired power plant per week. Why can't we put it in with the best technology? Why can't we get the people in China to stop burning dung in the street by having electricity? That's cheaper than what we are going to have to do with our society which is really eliminate our ability to use energy to compete with the rest of the world. [36:03]
JIM: Absolutely amazing. Listen, Bill, I want to thank you for joining us on the program and do you have a website so if listeners would like to find out more.
BILL: Absolutely: www.uschamber.com.
JIM: Thank you so much for joining us on the program.
BILL: Thanks.
JOHN: It's now time to go to the Q-line. The Q-line means the Question Line. We hold that open 24 hours a day for your questions and comments to the program. We ask that you keep them brief, tell us where you're from and your first name is just fine. You don't have to make a positive ID so we can track everything about you and steal your identity and then make off for Mexico. Of course, that wouldn't be any good anymore. With the way the SPP is going we really don’t want to go to Mexico. We want to somewhere safe like Venezuela! That would be safe. Your assets are safe in Venezuela.
The toll free number – now, bear in mind, if you call in while you're listening to the program, it's not going to make it on. We download these just before we do the program every week. It's 1(800)794-6480. That's toll free US and Canada. Although given the way the Canadian dollar is going we're going to make you pay your own way before long just out of pure spite. As a matter of fact, Jim, we need to take all of the border patrol from the Mexico border. We're not going to bother watching that border anymore. We're going to have hordes of frenzied Canadians coming down here because of the price differential to buy things. In reality in the west of Canada, I don't know what it's like in the east, you're beginning to see that. People are really crashing across the border here to – especially in the area of construction supplies. Where did I go here? Oh...
Our radio show content is for informational and educational purposes only, you should not consider it as a solicitation or offer to purchase or sell any securities. And reason for that being, our responses to listener inquiries are answered based on the personal opinions of James Puplava. And they don't take into account as a listener your suitability, your objectives or your risk tolerance simply because of the fact we don't know you. We can only guess by what you're telling us here on the phone call. That's all we can do. So we just give you general information. And as such, FSN is not liable to any person for financial losses that result from investing in companies profiled or stocks or anything like that.
We had four Q-line calls on one subject. So what we're going to do here is run a call from Jim in Portland, Oregon. We had Lionel in San Diego, Marty in Woodstock, Maryland and Jeff in Calgary, Alberta – all on the same subject. So we're just going to run one of these and then answer to this overall for everyone here. So holding your breath, here we go:
Hi John and Jim. This is Jim in Portland, Oregon. Question for you, people like Harry Schultz and Jim Sinclair are suggesting that people take delivery of certificates for the stocks that they own. Would you please comment to both in the case of people who are your own customers and whether or not people should take delivery of stock certificates and also in the case where people are customers like on account with, say, Charles Schwab. Thank you very much.
JIM: You know, John, we've gotten a lot of emails and Q-line calls on this. It deals with two things. Let's address the issue, pulling physical stock certificates. That could be a concern for investors with financial institutions which are involved in illegal – I say illegal – and unsafe practices involving let's say short selling of securities or loaning out more shares of stocks for short selling than the institutions actually have on the books. That's what we call naked short selling. And two institutions that have so much derivatives and leverage exposure that they are prompted by an unsafe level of derivative risk, unhealthy, let's say loan products or leverage at several online or other broker-financial institutions. So those are basically what the two calls are about.
And the reason they are saying this is because of Citigroup’s mounting losses, Merrill announcing 8.4 billion credit write down, The Union Bank of Switzerland exposure to subprime derivative hedges, Dillon Read, the bail out of two banks by Germany's bank, trouble at one of France's biggest banks, Société Générale; Countrywide, Wachovia debt writedown. So, is taking physical delivery of stocks or certificates a solution? Stock certificates are like unsigned checks. If you do something like that, you'd better store them in a locked safe. And also, trading physical stock certificates on your own is going to be challenging if you have a broker that's willing to work with you. Think about it, you have a stock certificate and all of a sudden you have bad news on something and you want to sell it, you can't sell it. You've got to get the security into the broker accounts. So when you want to trade, you have to physically deliver the certificate to the broker with the stock or bond power. And the broker has to verify the certificate before they can trade on it. That can take several days.
So what should an investor do? To protect against short selling in your account, do not add margin to your account. If you have a margin account, even if you're on margin, they can hypothecate your securities. So if you have a margin, pay it off, remove the margin ability from your account. Secondly, research the financial health of all of your financial institutions, bank, broker, mortgage company and you can – there are a couple of sites you can go to, one is the Office of the Comptroller of the Currency, and they have a quarterly derivative fact sheet and the website is www.occ.gov. Also if you’re with a financial institution that has deposit insurance, you can go to the Federal Deposit or FDIC analyst page at www.FDIC.gov And what you should do is review the institution’s annual and quarterly financial statements. If it's publicly traded, write a letter directly to the CEO of the financial institution.
Now, you know, we looked at this issue a long, long time ago. When I formed my own broker-dealer in 1996, we had money market funds that had gotten into trouble in 94, we had some financial institutions. And one of the reasons that we selected our clearing firm, which is National Financial Services (which is a branch of Fidelity), it does not do any underwriting. It has very limited exposure to derivatives and it generates the majority of the revenue from that service they offered to their...it really comes in from investment fees from mutual funds that they manage. It's also covered by SIPC which Security Investment Protection Corporation. The claims are covered by half a million dollars per customer, including a maximum of $100,000 for cash claims. It's not the same type of coverage offered by the FDIC. On top of that, they carry private insurance that offers excess SIPC coverage up to net equity for securities and cash through the Consumer Asset Protection Company. And you know, you can get access to this at www.CAPCOEXCESS.com.
But, you know, if you're working with a money manager, you can't work with a money manager if you have your securities – if you hold the certificates. You just simply can't do that. So, you know, the two rules are, one, do not have a margin account because your securities can be lent out. If you do then remove the margin, pay the account down. And then secondly research the financial health of all of your financial institutions. So anyway, hopefully that addressed these questions. [7:47]
Hello, Jim and John, this is John calling from Osaka, Japan. I'm so happy you guys, Jim and your family, made it through the fires there. I have a son and daughter and brother in San Diego and fortunately they also made it without any problem.
I have something to ask your comment about. It's concerning a program here in Japan run by the Tanaka gold company. You maybe familiar with them, I'm not sure, but they are a London bullion approved gold dealer here. Probably one of the largest in Japan. They run a program similar to dollar-cost averaging. What it is is they allow a client to – the client gives Tanaka gold company permission to withdraw a certain amount of money from their banking account each month. Then from the first day of the following month that money is spread out over the entire month going forward, and a portion is bought at spot prices every day until that money is depleted.
In other words, for example, if you gave them permission to take say $300 from your account each month, on the first day of the following month, they would buy $10 worth of gold and continue each day through the month buying equal dollar amounts of gold. It seems like this is a pretty good program for dollar-cost averaging, and there is no charge for the buy. You are charged a small amount for custodial fees. The gold is stored as allocated and is available from them, shipped to your door at any point of time you care to have it. Anyway, this seems very different from any dollar-cost averaging program that I’ve heard about there and I was wondering if you might have a comment on it. I appreciate your time and keep up the good work. Thank you very much.
JIM: John, great idea, great program. A great way to accumulate gold on a monthly basis. There is a similar program that James Turk has with gold money that allows you to do much the same thing. A great idea. [9:50]
Hi, I'm Charley from a Apex, North Carolina. And my question concerns the Canadian oil trusts. I know that they took a hit when Canada imposed the 15% tax on the earnings, but they still have a very good yield and I would have expected them to have performed better given the current environment for oil, and the dramatic price rise in it. If you could shed any light on that, I'd appreciate it. Thanks.
JIM: You know, Charlie, a lot of these oil trusts have maybe not done as well as some of the let's say, regular oil stocks. But you know, you take a look at some of these where the dividend yield is: 13, 14, and some of these are up on top of that, maybe eight or 9%. I like them. I think they are a great source of income. And I think the markets are over reacting to maybe a loss of possible taxes. If you're making 15 percent in 2011 and you have to pay a little tax on that, heck, that beats anything that you're getting in the way of dividends any place else. I happen to like the Canadian oil trusts. [10:59]
Hey, Jim and John , this is Roscoe calling from Baltimore. Thank you for the program. I've been doing what you've been telling us. I've been taking phoney money and exchanging it for the precious metals. Of course, the only extra money I had was what my wife had stashed away in the cookie jar. I took that and went ahead and made the exchange. When she looked in the cookie jar looking for that money. It was gone. I had some explaining to do. When I told her I took that phony money and changed it for the real stuff, she looked at me like I was crazy. And she asked for some of that money so she could go to the grocery store. I told her, “Honey, we can't be spending that money. We have to save it.” That's when I really caught the dickens. Anyway, I guess that's my problem.
My question is we're thinking about exchanging a gold mutual fund mining company for an ETF. And the reason I want to do that is because the ETF fund that's investing in money stocks the fees are a lot less. I wondered what you thought as far as changing mutual funds for ETFs for reduced fees. Thanks. Love your program and do keep my wife in your prayers. Thank you.
JIM: Well, Roscoe, I would suggest the first part of your problem, maybe you want to call in on the Dr. Laura show. The second part on exchanging a gold mutual fund for an ETF, I would look at the performance to make sure that, you know, if you're in a gold fund but you're in a good performing fund, look at the ETF that has mining stocks and see if the performance is the same. That’s because usually an ETF will be simply an index, more likely they will put a certain amount of stock. So it sounds like a great idea but check for the performance. [12:31]
Jim and John, this is Rich calling from Oregon. I wanted to thank you for your amazing devotion to the continual presentation of the Financial Sense Newshour. I listen to it whenever I can. My question is simply if you have, say, $100,000 in savings and you want to protect from the potential loss in purchasing power of those dollars secondary to dollar weakness, monetary expansion and the derivative debacle, how would you go about figuring how much gold and silver bullion, and how much precious metals or energy stocks; and foreign currency you would purchase to cover that risk? It wouldn't seem logical that you would have to deploy the majority of those savings just to cover the risk of depreciation and value of those dollars. So if you can provide some rough allocation, that would be very helpful. Thank you for your help. I don't want my dollars going down the [sound of toilet flushing]
JIM: Some of these guys are getting pretty creative, aren't they, John?
JOHN: I also think by the way, you have a lot of potential for marriage counseling here on the program.
JIM: That's a new segment we're going to add to the program next year. Your wife Carol and Mary will be joining us on the program and we'll have counseling sessions.
Okay, Rich, I would say probably 20 to 25 percent in hard assets are going to be a minimum to protect a dollar of savings. And I would use gold, silver bullion; I would be in energy and PM stocks. I'm not a big believer as much in foreign currencies because they are depreciating as well. I mean just look at a chart of gold in any foreign currency and you'll see the downward trend. So I would own the ultimate currency, which is gold and silver. [14:29]
JOHN: You know, we hear a lot from people who are sort of catching on to some of the things we're talking about on the Financial Sense Newshour, but ironically based on what Roscoe said in Baltimore is a lot of times trying to make a spouse understand what's going on is a real challenge, you know, for the husband and wife to see eye-to-eye on this.
JIM: Oh, sure. Explaining the concept of dollar devaluation or depreciation. Just look at the guys on the cable channels that don't understand – or look at our own Federal Reserve example! You know, “the things you buy in the US are denominated in dollars then you don't have a problem.” So it's hard enough that the experts don't understand it, you imagine sometimes a spouse who isn't involved with it.
Hi Jim and John. This is John from Windsor, Ontario where I know FSN has some very grateful and loyal listeners of which I am one. My question today is, as I watch the US financials fall faster than Dom Deloise on a grease slide pole, I was wondering if this may be signaling a more imminent systemic risk or rather it's simply a correction? Also, as a Canadian investor, would you be playing the hand any differently? Thanks very much.
JOHN: Is that with or without clothes by the way? I’m trying to picture it.
JIM: Well, I think the financial stocks whether you're looking at the banking index, the financial index, broker index, they are all signaling more of the problems to come. And if you listen to our second segment in the first hour, it ain't over yet: This process of writing this stuff down is going to get more pronounced as we go forward. And I think that's what those indexes are indicating and that's why I would be in hard assets because they are going to inflate their way out of this. [16:10]
Hi, John and Jim. It's Chris from California. I had a quick question about whipsaws or slippage. I noticed on the gold and silver mini contract, I think it was for October 31st or on the 1st of November, they had this a real short period of time where they did this violent drop, and then an equivalent rise of prices.. Basically they have a zero sum gain or loss or however you look at it. I'm not too familiar with these things. Some of my friends who are traders talked with me about whipsaws, so I was wondering if you could explain me what a whipsaw is and or slippage because it seems like a human being cannot order or answer that kind of an order that fast because it happened within like 30 seconds from what I looked on the charts. Thank you very much. You guys are doing us a great service.
JIM: You know, Chris, I'm not really sure what causes that. I wouldn't be qualified or feel that I could give you a good, knowledgeable answer to that. Maybe that's something I could bring up with somebody that – oh, somebody like a Dick Morgan that knows a lot about the futures market because we don't deal in futures as much. So sorry, I wish I could answer that question, but I don't have an answer for you. [17:25]
Hi, Jim, this is Barry from San Diego. The question is: If the stock market has a considerable drop back, say about 1000 points or so, and there is a rush for cash for people to cover their margin calls, is it very possible that gold and silver would selloff temporarily to liquidate those assets that had the largest gains creating possibly a buying opportunity for those who have missed it to this point? I'm looking forward to your response and thank you very much.
JIM: Gary, I think you may see some of that happening right now and especially as the Yen has increased in value against the dollar, so you may have some unwinding of the carry trade. And if you look at what's done very well since August – the energy sector and the gold and precious metals. Absolutely, you can see some of that unwinding as we speak. [18:12]
Hi. My name is Chris. I'm from London in Canada. My question is about the possibility of a financial melt down. If you say all the derivatives, the 450 trillion of them out there, some few of them actually go bad and the open amount knocked down. Instead of being an opportunity for $1000 gold or $1550 gold, what is the possibility of the financial sector going under and say like banks in the Great Depression and everybody basically losing their money? I appreciate your advice and – thanks a lot.
JIM: Chris, I think as you see this crisis, as this 300 to 500 billion of write offs that we're talking about accelerate here over the next six months, you're going to see more money printing than you've ever seen. And I think as a result of that, you will see gold over $1000. [19:03]
Hi, Jim and John , this is Don from Tel Aviv. I hope I find you all well. I have two questions. One, do you have any idea how to buy or invest in the Chinese currency. A second question on farm land: some famous investors are recommending investing in farm land. What is your estimation if grains go up in the several years, 200, 300, maybe more percentage-wise – by the way, do you think it’s possible? – then how will farmland prices will behave compared to the grain? Will they go up less or even more and act like an option? Thank you very much.
JIM: Don, one way to invest in the Chinese currency would be to invest in stocks on the Chinese exchange. I’d tell you to be real careful on that concept! Especially when I take a look at China's market, which is up over 100 percent. Actually, it was up more than that. It's been correcting here lately.
Getting to your question on agriculture, I think it's a great idea and one way to do that would be to invest in an agricultural ETF because I do expect farm land and all grain type products to be going up. And I also believe that productive farm land will also be commanding a premium because our food stocks are also going down.
Hey, Jim and John this is Edward from Vancouver, Canada. This is Saturday morning when gold just closed yesterday at $800 dollars an ounce. I just wanted to point out to listeners that I wrote an essay back in 2003 that was first published on your website called the The 5th Wave Advance in Gold when gold was at $350 dollars an ounce, where I predicted a move over a thousand dollars in the coming decade.
Well, it looks like my theory has been proved correct and Robert Prechter who was basically the person who resurrected the Elliott Wave Theory in the 1970s was very bearish on gold throughout most of the early part of this decade. So it looks like the debate of between gold and Elliott Wave Theory is done. The battle is over and people like myself and Bob McHugh who studied Elliott Wave Theory along with classical technical analysis have been proven right. This is clearly a time for celebration of the gold bull and it looks like clear sailing ahead.
I just want to point out one more thing before I go. November to May is the strongest time in the stock market in the last 50 years which also actually is mostly the strongest time for gold. Bud Conrad who is Chief Economist at Casey Research came out with a beautiful essay last week talking about that why gold might have a spike in the next six months to over $1200 an ounce. So it looks like we've got a perfect storm in gold here.
And one more thing about Fed rate cuts with “Helicopter” Bernanke dropping rates again for the second time. People need to understand that he's going to have to cut rates as fast as he can in the next six months because this is a political election and you have – I've been watching the news and reading newspapers every day and you haven't heard one comment talking about why the Fed can't cut rates later this year when the federal election gets closer and closer. Because the Fed can't politicize the move, so they have to cut now before the election because Bush knows his father lost the election because of the economy and Bush does not want that to happen again with every single person in his cabinet gone except for Condoleezza Rice. All he has is Bernanke.
So with that, look for fast rate cuts, gold to the moon, silver is going to go to $25 and Jim, you've been a huge influence on my life.
JIM: Edward, I agree with your analysis. Once we take out a thousand and I believe we will, you're going to see a quick rush where it goes beyond that and could go to 1200 or 1400, because believe me, when we get a 4-digit gold figure, it is going to be headlines. Even the guy on the street is going to start taking notice. And who knows, maybe Maria Bartiromo will start wearing all kinds of gold jewelry or something to celebrate, but it will get silly at that point, but I agree with your analysis. [23:22]
This is Warren from British Columbia. You're discussing $100 oil in the United States but in every other country which buys oil, oil prices are flat because of the increasing value of their currency. The question is how will the rest of the world be affected as oil prices remain flat but go up in the United States? Thank you.
JIM: Well, they obviously are less affected than we are because their currencies are appreciating in dollars. So while we in the US are paying 96, but even in their own currency, we're looking at higher prices. And remember, they have a lot more taxes in their system over there. I mean, we in the US are griping about paying $3 for a gallon of gasoline and more. Imagine what it would be like over there. They are already paying I think 8 or $9 for a gallon of gasoline, so they are still going to be affected. [24:18]
Hi, Jim and John , this is Dilip from Santa Clara. I'm calling regarding the last week's program where one of your guests, Puru Saxena, said that oil is a little bit ahead of itself. So I'm looking at the 200-day moving average and it’s showing oil at 75 – the 200 DMA that is. So if oil does decline to $75 mark, what do you think will be the implications for stocks –domestic and international and energy stocks as well? Also what are the implications for bonds, gold and gold stocks and alternative energy. Of these, I have a feeling that alternative energy would probably go down if oil goes down but I'm not sure what would happen with the rest of the market stocks, bonds and gold and others. So what are your thoughts on this? Thank you very much.
JIM: You know, Dilip, I'm watching the demand curve and the demand curve is very strong as we head into the winter months and the cooler temperatures. Could we get $75 oil, if there was some kind of financial panic, crisis, huge selloff, yeah, that's a possibility. I'm not a technician so I'm not going to tell you it can't occur. If oil went down to $75 a barrel, you would probably see the resource assets probably sell off and just like money moving out. But let's put it this way. If that was to occur, I would take every penny I had and I would buy, buy, buy. [25:51]
Hi, my name is Gerald. I am from Florida. And I watch your show for like since I was in high school and I just wanted to ask you guys one quick question: Where can I buy shares of the Federal Reserve? That's it. Bye.
JIM: You can’t unless you're, you know, a member bank. It's sort of like a private banking cartel. No. It's not a public company. There used to be a public [central bank], the Bank For International Settlement, which is the international kind of central bank, which used to have a stock. It was undervalued. We used to own it in the 90s. I think it was like $10,000 a share or something like that. We bought it at 6 and it went to 10 and then they took it private. But that was the only central bank stock that you could buy. [26:42]
JOHN: I want Bernanke to work for me.
Hi Jim and John. This is Andrew from Australia. I would really appreciate a discussion of what figures to use reliably when calculating the costs per ounce of gold in the ground if a company has no proven and probable reserves, only claims of indicated and inferred resources. Can I treat these figures with any confidence. I’ve been looking at an Australian junior with 10 million inferred ounces, currently valued at around $23 per ounce in the ground. Now management classifies this deposit as a hybrid resources and I quote: “the reliance of analysts on proven [gold] reserves to reduce their risk in analyzing a mining companies is inappropriate for narrow vein gold mine. It is not necessary to have proved reserves to start and operate a profitable mine provided the deposit is well understood.” Now, since I was stopped out of Bendigo Gold because of this kind of wishful thinking, should I treat these figures with any confidence? Much appreciated.
JIM: You don't have to have proven and probable reserves and depending on the mining deposit and the type of operation, there are some mines that don't even have feasibility studies. So I would have to study more of the deposit. I would want to learn more about it, I would like to look at are there similar mines in the same region that have gone into production and what kind of mining technique? Is it heap leach, is it underground, open pit, whatever the mining is. So what I would do is hopefully look around where this mining company operates and where it's got its resource and take a look at similar comparisons to other companies to get an idea of indeed what this company has may indeed be mineable. [28:20]
Hola, Jim and John. This is Richard calling from Buenos Aires Argentina. Jim, last week you spoke rather positively about how late stage junior gold developing companies are becoming take over targets by the big boys once they can prove 2 million ounces and can demonstrate blue sky potential. But Jim, you said that this was a good thing. Why? Wouldn't it be better for this hypothetical junior and shareholders to avoid a take over and instead go into production on its own? Are such factors as the uncertainty of how long the bull market will last, are the prospects of astronomically high energy and mining costs might be forcing juniors to be a take over strategy as the more profitable alternative than going into production on its own.
JIM: You know, Richard, when I was talking about juniors being taken over, it's a trend that’s going to happen. If a junior stock is undervalued in terms of its resource, its ounces in the ground, whatever that value is, that becomes a real possibility. Would it be better if the company could go into production? Yes. If they could do it, go it alone and become a large scale producer, if it still has upside resource potential to not only increase its reserves, increase the production – that would be the ultimate goal for a company because you're going to realize more as a producer. That’s because, number one, two things happen: one, you stop dilution because the company now has money coming in so they don't have to tap the equity markets with financing. But you know, sometimes if a company becomes overvalued (and you've seen this with hot gold stocks, Virginia Gold, you've had companies like Aurelian) where the valuation gets to such a high level that you've already realized probably the full potential of what that stock can be.
But in cases where companies have their reserves that are extremely undervalued, they are very vulnerable if they prove out the deposit. Like let's say, you've got a two million ounce deposit and you have a lot of blue sky and you can go and become a 3 or 4 million ounce deposit. And number two, you demonstrate that the ounces that you have are economically viable ounces. In other words you can put in a mine and make money and you've got a lot of blue sky, you become vulnerable. I'm not saying it's a good thing. I'm just saying that this is a possibility that can happen. But when your stock is undervalued and you have the potential to go into production and you can do so with limited dilution, you'd be better off for your shareholders because then your shareholders are going to realize the upside potential as the company turns into a cash flow machine. [31:09]
My name is John from Maine. This question is regarding diesel cars. My lease is going to be up in January on my gasoline vehicle and I'll be getting something else. And I know Jim is very big on diesel and I wondering if simply because the efficiency is over 30% more efficient than gasoline and you won’t have to fill up the tank so often? Is that the only reason? You say that you see the possibilities of rationing and shortages. Do you think diesel is going to be easier to come by than gasoline, or will we still have the same problem in terms of shortages and rationing and so on with diesel vehicles – in your opinion? Thank you for your show and I look forward to your answer.
JIM: John, a lot of it is because of the efficiency. I know the E Class diesel by Mercedes gets 780 miles on a tank. So if we go to rationing and each family only gets 20 gallons a week, I mean you can go a long way with that diesel. I also like hybrids. But the only thing you have to be aware of on a hybrid that may get 40, 50 is that those batteries have to be replaced after a certain period of time and it would be quite expensive. The other aspect of diesel though, it would be much easier to make biodiesel. I think initially – here would be one reservation I have about diesel is if there was a sudden, I don't know, a refinery blew up, there was an accident in your neck of the woods and diesel was limited in terms of its availability, they would give it to the transport system first because right now I know here locally in California, right now you're paying more for diesel. There is a [higher] premium for it than there is for gasoline. So I simply like diesel for the efficiency and I know for example with an E Class Mercedes you can get almost 800 miles on a tank of gas. So even if it was hard to get, 800 miles that's a lot of mileage. For me that would be two months worth of driving. [33:20]
Jim, hi. Charley in Rockford, Illinois. I love the show. Hey, the question is: the Fed was created by some pretty powerful people, the Rothschilds, Bank of America, I think JP Morgan and some other pretty powerful names were in it. And they seem to know what they are doing, so isn't Bernanke kind of more of a figure head? And if they do know what they are doing why aren't they doing it? Thank you.
JIM: Ultimately, I think the ultimate goal is depreciation of the currency and a global central bank. [33:50]
Hi, Jim. Is this Rich in San Diego. You know, somebody had a question about the Central Fund of Canada a couple of weeks ago about why it wasn't keeping up and I agree with this gentleman. I bought shares in CEF in the middle of December of 2006, 12/15 or 12/14, at $9.48 a share. And today it's whatever it is – today's closing price, today is Wednesday the 7th, and it's up – gold was 627.40 at the time I bought it. Gold is up today 32.77%. And silver is up about 14%. I couldn't get the closing price on 12/14/06, but about 14%. If the Central Fund of Canada is up 16.46%, so it’s half of gold's increase of 32 over that time period and that's discouraging. I know there is a load factor, but there is like 51% gold/49% silver and some change on those percentages. So what's up? Why isn't this a good proxy and why isn't it keeping up? Thanks a lot. Appreciate it.
JIM: I think you have a couple of things as you do with closed end funds like the Central Fund is there is two things that factor in that. One is a load and second is the percentage premium. And what has happened as the price of gold has gone up, it competes with other gold type vehicles. What has happened is the premium over net assets value has shrunk. I've seen a premium on Central Fund be as high as 15% and now that premium has shrunk to about roughly about 4%. So you've seen the shrinkage in the premium and then you have a load factor. [35:40]
Hi, my name is Doug. I'm calling from Indiana. And I'll keep my question brief by not telling you how much I enjoy your show. I have a 401K which does not allow me to take money and put it in a money market fund. I have to invest it in a mutual fund. And as I looked at it, all of the mutual funds go up and down with the stock market. I can however take 20% and put it into a brokerage which I have complete control over and I'm thinking of using that to hedge. I'm looking at inverse and double inverse ETFs. For example, there is an double inverse SDS (like in that Vietnam anti war group back in the late sixties) that goes up 2% every time the S&P 500 goes down 1%. I recognize it's not likely to give me a complete factor of two.
What I'm really concerned about, though, is that the organization that puts it out might sort of fold under the credit crisis and I’ll be left with not bad performance, but zilch. Trading will just be stopped on it. I notice that these inverse ETFs and double inverse ETFs also have counterparts which are supposed to go up twice as fast as the S&P 500. So I'm wondering if that is perhaps reassuring sort of thing like they could balance it out that way, make the counter party risk [inaudible] by the other ETF. I'd appreciate your opinion on whether it's likely this sort of double inverse ETF would be a casualty of the credit crunch. Thanks.
JIM: You do have because you are dealing with derivative-type actions in these reverse ETFs, Doug. If you can take out 20% and put it into a brokerage account, why don't you just buy something like bullion, gold or something like that and use it as a counterweight to what's going on in the market rather than dealing with an inverse ETF, which is basically a derivative. [37:30]
Hi Jim. Hi John. It's Vera calling from Toronto. A bit of a story and a bit of a question. I'm calling from Toronto Canada and one of the places I know is running over a counter and get some gold silver bullion and return it is the Scotia Bank at Kenyon Bay. I go there every couple of months get a few here, a few there. And usually there is not more than two ore people in line and maybe you wait at most 15 minute to see a teller and it takes them 20 minutes to fill out the paperwork, take your money, take your Monday, go to the secure counter, come back and had you the stuff. Today was real interesting. I was going there today thinking I should buy some more of this stuff. Maybe the Canadian dollar will probably fall back a bit, but bullion will stay high. I guess quite a few people had the same idea as me. I had ten people in line ahead of me and another ten behind me or so. After I stood there waiting for 10 minutes and the line was moving so slow I had to turn around and leave because I was on my lunch hour and had to go to work.
My question is: have you noticed any extra interest in buying bullion in your neck of the woods and have your readers noticed? I mean the line wasn't outside of the building and around the block, but I wonder how long before that will happen. Thanks so much and maybe I'll go back tomorrow morning before the crowds hit and see if I can get a hand on some stuff. Thanks. Have a great day.
JIM: Vera, our banks aren't doing that here. I mean if you walk into a typical Bank of America branch or a Wells Fargo, you're not going to be able to get it like what you did with your bank. So in terms of do I notice people buying? I have talked to bullion dealers and they tell me business is brisk. So I haven't noticed it here locally in the bank because our banks usually don't do that, but the bullion dealers tell me they are doing brisk business. So maybe that lines up with what you're seeing
Hi, Jim and John , this is John in Portland, Oregon. Good day to both of you. I was reading Frank Barbera's commentary the other day where he had a lot of bank charts and obviously they are all heading in the nose dive section. So I'm wondering at what point do the financial sectors of the market become a good deal and contrarians should actually start moving into that area? Thanks and looking forward to your response.
JIM: John, I think when it gets so bad and it just looks so ugly – there is blood in the streets – that's when the system has basically been cleansed. But we still have, I don't know, two or three hundred billion to write off yet, so you've got a lot more bad headlines coming in the fourth quarter, and the first quarter and second quarter of next year. Somewhere around there, we are going to get to a bottom. I don't know when that is going to be, but you'll know it because it will be on the front page of the magazines, it will be the evening news, the politicians will talk about it, your neighbors will be shivering in their boots and thinking the end of the world. When it gets to it sounds like the end of the world is going to be tomorrow, then that’s probably the time. [40:13]
Hello, John and Jim. This is Frank calling from Seattle. And my question for your program is are we importing inflation and exporting deflation? I would appreciate it if you could go into it in a little more detail and explain that relationship for the listeners. Thank you.
JIM: Actually, we're exporting inflation and through that it is coming back to us and we're also importing inflation. In other words, as we export all of our dollars, we're taking our excess dollars, if they could only be contained here in the US, we would be seeing much more inflation. But also as a result of all of this excess dollars and because the fact that we're no longer a manufacturing society, we have to import a lot of what we have as the dollar goes down, we're also going to see that come back to bite us as the cost of imported goods goes up. So we've got a little bit of both going on. [41:17]
Hello, this is Steven from Chandler, Arizona. I've got a question on the water utilities. I’m trying to find out your opinion on the negative free cash flow for most of the water utilities and how that affects your decision on buying them or what is your opinion? Thanks.
JIM: Some of them are experiencing negative cash flow. Others have positive. I like water utilities that are able to have positive free cash flow. But you know, when they are in a growth spurt and especially some of those that are doing inquiring where they have a lot of money out front and a lot of building of infrastructure, you're going to have negative free cash flow. I would look at the growth rate in earnings and sales as a measure. But right now, as I look at one of my favorite water utilities (we've owned it before and we've sold it) the unfortunate thing is the dividend yields on many of these stocks are so low right now and also the PE ratio is so high that we're just not touching them. You're looking at PE rates of 31, 28, 55, 28, 32, 47, 37. Where we're finding value is you're going to have to look overseas, so it gets a little bit more complicated than that. [42:34]
Hi, guys. Thanks again. This is Kevin from California. There’s some fortunate timing, I’ve got some money that I wanted to deploy like this week. However, I've been accumulating and find it hard to add it my silver position when my contrarian view asks isn't there going to be a dollar bounce because it's gone off the cliff? One article I read said we have pictures of rappers and they are not tossing around dollars they are tossing around euros and some model named Gisele Bundchen requested that she be paid in euros. So I wonder are we there yet where the point there is going to be a backlash because it seems logical at some point we get a reversion to the mean; or at least a bounce? So long term, yes, but it seems like short term there’s got to be a bounce here somewhere. I would be glad to hear your opinion.
JIM: At some point we will get a bounce. But I don't think it's yet. I mean, what's the possibility the Fed is not going to cut interest rates in December and raise rates? I don't think so. At some point foreigners are going to start cutting their interest rates and they are going to respond to us in terms of the dollar's decline. I don't know when that point is going to be, but maybe when they start doing something like that, we may see a rally in the dollar. But you said something, you’ve been accumulating silver and what I would do is I'd continue to accumulate. If it's up this month, well, you're going to buy less; maybe next month there will be a correction or pull back. But to me silver is looking pretty strong here. [44:04]
Hey guys, this is Brian from New Orleans. I just wanted to call about juniors in Canada. They are just not reacting with the price of gold and silver and quite frankly I'm finding it rather disheartening. I've heard several times you all say keep the faith that you have to be patient. But here's my question. I think one of the big issues that's taking place is the change in the Canadian dollar. And I wanted to know if those same factors were in play when they had the last great gold run in the 80s and if maybe it is somewhat different this time? I'm also thinking about the ETF and it might be gobbling up quite a bit of the capital that would have – because it's so easy to go buy the ETF as well as the miners. All right, guys. Well, sorry for the disheartening call. Thanks a lot.
JIM: You know, Brian, I don't know what juniors you're looking at. I know that some of the late stage development companies like in the FSO Index are not up as much as some of the large cap stocks. And I think there is a couple of reasons going on here. Number one, bullion has gotten ahead of the stocks. The stocks, I think, are more reflective of better value today than the bullion; and the stocks are going to have to play catch up so that's number one. I think you hit upon another issue there is like the gold ETF or the silver ETF which seems to be very liquid, it's an easy tradable device so that's the second reason.
And thirdly, I think a lot of people if you look at, for example, the major indexes, gold indexes like the HUI and the XAU, there is not a lot of belief that this is sustainable. So a lot of the money that has come into the gold market has come into the free trading or the large cap stocks because people are saying just like the ETF, they are saying, “Well, I'll ride gold's rise, I'll go into a large cap gold stock, a Barrick, a Newmont an Agnico. And if gold corrects, I can quickly get out of it because these stocks are big and liquid.” So I think it's a combination of all of those three and behind all of it is a lot of people with just a little bit of doubt in terms of sustainability.
I'm looking at just a list of juniors. I have a screen with 50 juniors on it, and I'm looking at 140, 150, 143, 57, 107, 105, 90, 132 percent; so we've seen some big gains here. [46:47]
Hey, Jim and John. This is Glenn from Tennessee. I love your show. It's hard being an Austrian in a Keynesian world. My question is often Keynesians and modern economists say that the gold standard was too inflexible and that the average citizen suffered because government cannot give the markets more fuel than the form of money. I was wondering if you guys could talk about that and debunk that notion. Thanks.
JIM: The gold market is not inflexible. What basically happened and this gets to the Great Depression is they were saying that because they couldn't inflate because there was a limitation on gold, one of the reasons by the way they confiscated gold from Americans was so they could get the extra gold to inflate the currency because we backed the currency. That is just strictly bunk. And politicians are saying that, you know, the gold market was inflexible, it created restrictions on government. It did enable the government to fix things. Well, if anybody can take a look at what we've done since we've gone off the gold standard and gone off the dollar-gold standard and say that central banking has worked, that is absolute nonsense. We still have the boom-bust cycle. Is it hasn't gotten rid of that. And look at the amount of debt levels that we have today. Look at the amount of leverage that we have today. Look at the degree of uncontrolled government spending deficits and debt that have resulted. I mean you can take a look at the US budget deficit when we were backing our currency by gold and look at the deficits that we have today and the amount of debt, and there is a clear indication that any of this Keynesian stuff has ever worked. All it's done is just make the problem worse off.
And if you take a look at when we went off the backing of the gold in August of 1971, you know, I grew up in a family of 10 kids where my dad was just a simple cabinet maker and my mother stayed at home and my dad was able to go to work and support a family of 10 kids, send me to private school. They invested in property. They were able to do that because they didn't have the inflation. You take a look at what happened during the 70s when we went off of that, the government was fixing things. The combination of taxes and inflation resulted that most middle class families today, the wife had to go to work to make ends meet; then in the 80s and 90s we met our increased consumption of rising prices by drawing down on our savings, so today we have no savings rate. And then we had to add debt on top of that. So this notion that the Keynesian cycle has worked and has allowed government to fix things, the only thing they've done is create one big mess. [49:57]
Hello. My name is Mary. I'm calling from Salt Lake City and I had a question for Jim. First of all, I’ve listened to it, I think, since it first started on the internet and I really enjoy it. But I had a question. I've recently had a CD that has become available and I want to put some into something safe. I don’t know whether to buy one ounce gold coins or whether to participate in James Turk’s GoldMoney.com, or perhaps even Everbank. I am not sure which would be the safest place for my money. I have got $35,000. I am retired. I am very comfortable with my retirement income. However, this is just extra money that I want to preserve again if I can. Thank you for answering this question.
JIM: Mary, either choice; and you might want to do a combination of both. You might want to buy some gold directly, have the gold coins, and then also use James Turk’s GoldMoney because that would be bullion held overseas. And you can use GoldMoney as money. You can have money wired to bank accounts so I like the combination of both to tell you the truth. So I would divided it between the two of them. [51:01]
Good morning. This is John from Jacksonville, Florida. I'm calling in regard to a Reuters’ report where “Barclays rejects talk.” it faces a ten billion dollar write down. If this is the case, how would that affect their gold-backed ETF? Thank you.
JIM: It depends if they pledged those assets. But those are supposed to be allocated assets to the ETF. The $10 billion writedown is going to affect more of in terms of their capital ratios than anything else. It's my understanding that the gold is pledged behind the ETF, so I don't think it's going to affect their gold-backed ETF. [51:42]
Hi, Jim and John, this is Edward from Palm Beach county Florida. I'm watching the US dollar index chart right now on Kitco. It's about 11:00 a.m. Eastern Standard Time. I just saw this sucker drop to about 72, and then it popped right back up to 75.4. So I'm just curious what would cause this to happen? Did somebody suddenly dump a large amount of US dollars? And was the Working Group picking them up? Thanks a lot.
JIM: You know, I'm just trying to look at a chart here. I have a bar chart for the last week. I don't see that showing up anywhere in my bar chart, but you do get some sharp spikes intra-day from buying and selling, which is what might cause that; but looking at my chart here, bar chars for the last week, I don't see that. That's what might explain it if somebody goes in with a large sell order, buys puts or whatever they are doing, you can have a lot of selling come in to drive it and immediately somebody responds in the opposite direction. Usually that's when you get these price gaps. [53:00]
Hello, Jim and John it's Rob calling from Ontario, Canada. I appreciate you show. I love it. In fact, I can't think of anything I'd want to improve – I especially love your Andy Looney series – except maybe a forum. I'd really like to see a forum on your website, Jim, where I could pose questions and have some of your fabulous listeners, not necessarily you, answer them because I've been listening to the program long enough to know there are some pretty smart people out there listening.
JIM: Robert, we used to have a forum on our show and we did away with it because there just wasn’t a lot of people participating. So we did have one, had one for a couple of years. I suppose if there is enough request, we would add it back. The only thing I would probably say is if we did it, we would probably have foreign monitors to make sure we don't get bashers and the kind of people that basically what I call ruin the internet because they are trying to come in and manipulate. But we actually used to have a forum. So if we had enough requests we'd probably add it back. [54:03]
Hi, Jim and John, great show. This is Bob. I live in San Diego. Here's the deal. I think I'm driving my wife a little nuts with the hyper inflation, falling dollar etc etc. So what I'd like to do is give out my email address, to see if anybody who listens in San Diego would like to get together every two weeks for coffee and save our spouses, I'd love to hear from you. I'm at SanDiegoRoss@hotmail.com. So again, if you live in San Diego and want to save your spouse, give me an email, get together, coffee, lunch or whatever. So keep up the good work, guys. Thanks.
JIM: SanDiegoRoss@hotmail.com. John, we got a lot of wife issues. We're going to have to add a counseling section to these shows, don't you think?
JOHN: Either that or No Spouse Left Behind, you know, as a special education series. Okay.
JIM: We are going to – maybe that's something we can consider next year, a hyperinflation counseling center where we can put spouses through therapy training; or maybe have spouse boot camp or something like that. I don't know.
Anyway, once again, Bob's email SanDiegoRoss@hotmail.com and if you are commiserating with the problems with the wife's cookie jar. Wait. Who was it that had the problem with the wife's cookie jar.
JOHN: Roscoe in Baltimore. So Roscoe, email Bob in San Diego.
JIM: Maybe you can't get together, but maybe you can get together on a chat room or something. So any kind of therapy questions, would you please send them in and we'll see what we can do. [56:08]
JOHN: Yeah. Okay well, that's it for the Financial Sense news year, today’s program. It's before you know it it will be the Financial Sense News universe and it's going to be – we're going to have some interesting guests coming up in the next few weeks plus we have the Gold Show coming up Thanksgiving weekend here.
JIM: Yeah. Let me see. Next weak we've got Kenneth Fisher, Paths To Wealth Through Common Stocks; that's Ken's new book and hopefully Ken will get it to me before the interview so I can read it.
And then on November 24th, a special edition of the Financial Sense Newshour, that's going to be our annual gold show. In fact, John, we've been busy conducting interviews. We've got a whole view of interviews that we did this week and next week in preparation. In fact, we're going to be doing these interviews all of the way until the day before Thanksgiving, so it's going to be quite a show this year. We’ve got quite a line up of junior companies and also a couple of the majors, newsletter writers, a round table, just all kinds of neat stuff. And this time the technology is working which is one of the reasons why I chose to forego going to the San Francisco Gold Show unless I just – most people don't realize, John, the technology that we have that we do this show. You've got a studio. I've got a little matrix mixer here with a head set that plugs into a phone line. And unfortunately a lot of times you go to these conventions you don't get a clear signal phone line that we get and we've had problems in the past. So that's why we decided to forego it this year. So that's coming on the 24th.
December 1st, Charles Mizrahi, he's written a book called Getting Started In Value Investing and he'll be my guest.
Also coming up next week another voices we're going to have Matt Simmons on the program and we're going to talk about this issue: global warming or peak oil, which one comes first? And Matt will be my guest in Other Voices this week.
Meanwhile, we're out of time. So 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