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The BIG Picture Transcript
November 17, 2007
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  Part 1
  The Return of Headline Inflation
  Behind the Numbers: What they never tell you on cable
  Capital Controls / Dollar Devaluation Where will those dollars go?
  Part 2
  They Still Don't Get It
  Other Voices: Matthew Simmons, Chairman, Simmons & Company Int'l
  Other Voices: Bill Murphy, Chairman, Gold Anti-Trust Action Committee (GATA)
  Q-Calls

 Part 1

 The Return of Headline Inflation

JOHN:  Welcome back to the Financial Sense Newshour, and this is the part of the program which we call the Big Picture in which we try to connect the dots and project the trends – remembering that, of course, the herd is almost always running in the wrong direction and the media are looking in the rear view mirror – to find out where they are going.

Speaking of all of this, Jim, remember a number of years ago you wrote a piece called The Great Inflation and that was back in 2004 when virtually everybody on the street was worried about deflation because that's the way the herd was running.  When you said it's going to be inflation you took a lot of flak over that piece.  But now it looks like it's playing out according to the script.  Which I guess is always a great “hold your breath moment” there when you finally say, “hey, it's playing out, this sort of forms a catharsis:  I was right.”  It's responding in the direction of what we've been talking about here, the perfect financial storm and what it would look like.  And in the Storm series, which is still available on the website, you outlined multiple scenarios, deflation, stagflation, inflation or hyperinflation. 

JIM:  You know when I wrote the Perfect Storm series starting in the summer of 2000, I finished it in October of 2001, I really didn't know, John, how this was going to play out.  After I finished the Storm series I spent about two or three years reading and studying everything I could to understand about how inflations and deflations come about.  And in the summer of 2004, I experienced an epiphany that summer; and that's when I wrote The Great Inflation in the fall that year.  And then, of course, about a year later, I wrote The Two Bens and that was the result of all of that study.  And I became convinced at that time that it was definitely going to be inflation.  [1:56]

JOHN:  I know in order to do that I remember you read a lot of history and economic books.  What had more influence over your thoughts in that area?  Obviously you can read all of the history books you want, but it's more of your philosophy and your organizing ideas – almost your economic weltanschauung, your world view – that's going to determine how you put things together. 

JIM:  Well, I approach economics from the Austrian school, so I had a firm foundation on what causes inflation.  And it always is a monetary event.  But I also wanted to study how inflations played out throughout history and for example, why deflation takes hold in one era, for example the US in the 1930s, or Japan of the 1990s.  But I was also looking for patterns in the past. 

There were a number of books that sort of altered my thinking.  We've talked about them here on the program over the last couple of years. Some of the books that we had on inflation that stand out were: Bresciani-Turroni’s book; Jens O. Parsson’s –who we've often quoted here – and his book Dying of Money; and Adam Fergusson's book When Money Dies; and also William Guttmann.  But a couple of other books from a historical perspective were David Hackett Fisher and Rothbard which kind of stood out and influenced a lot of the conclusions I drew from the studies I made.  [3:20]

JOHN:  Were there any patterns that you discovered in the midst of this?

JIM:  Yeah, there really were.  David Hackett Fisher, an historian, did a great job putting inflation patterns together.  And here's the remarkable thing, John, when you look at history: all great inflations have important qualities in common.  They all share sort of a wave-like pattern according to Fisher, much like bull markets and bear markets.  You know if you look at charts, they have a pattern that stands out.  They have the same sequence of development, the same pattern of price relation, similar movements in for example wages, rents, interest rates.  And they all have the same dangerous volatilities in the latter stages such as we are seeing today. 

And here's the remarkable thing. All of these major price revolutions in modern history really began in periods of prosperity.  Think of the 1990s or the 1980s.  Each of them ended in shattering world crises.  Think of Germany in the 20s and 30s, the US in the 20s and 30s.  [4:28]

JOHN:  Yeah.  I can even think of the Falklands War.  Remember that? Argentina was having severe economic problems and the military government there decided to start a war with Great Britain over what they called the, “Islas Malvinas,” the Falkland islands and everything. 

Why do you think we're condemned to repeat this?  If the pattern is so clear and you can look back in history, how is it that politicians...I don't even know why I'm asking this question having watched the debate last night.  It happens over and over again with incredible reliability.

JIM:  Something that Fisher talked about in his book when he wrote:  

What happens in the future is contingent [and this is key] on the choices in the present, which derive from our memory of the past. 

So if we've had a period of benign inflation over the past two decades people tend to think of it that way.  And this is why I think we've been lulled into complacency is the inflation in the Greenspan area – and Greenspan really was an inflationist – occurred mainly in paper assets.  We got these asset bubbles in the market or in this decade we got them in real estate.  However, we've now arrived at a point, as a result of Greenspan's inflationary policies, at what I call the end game.  And when you think about it, Bernanke is now in charge of bringing it to completion.  [5:55]

JOHN:  Okay.  Let's talk about price patterns and the clues to this whole thing.

JIM:  It's amazing.  There are some common features.  One of them that stands out is population growth.  And if you think it logically, when population increases, what comes with that?  Well, you have more people on the planet; that means people need to have more food, you burn and consume more energy, there is more demand for housing and land.  Demand for life's necessities expands more rapidly than supply can increase and inexorably prices rise; and this is facilitated by money growth.  And just think of China and India today; and think of what we're seeing first in energy, now what we're seeing in food.  And I think also below the radar screen, which is also becoming a major problem, is water.  [6:42]

JOHN:  Which is one of the chief ironies of the whole thing because when you look at the fact that energy and food are the two things that any family anywhere on the planet is most principally concerned with, those prices are rising.  But then we back them out of our price indices and dismiss them as being unimportant.  It's almost a cruel joke in the midst of this whole indexing of inflation.

JIM:  Absolutely, because when you study inflations through out history, rising energy and food prices are a warning of what is coming.  Whenever food and fuel prices rise together overall inflation soon increases sharply.  And historically, the most rapid rises appear first in the price of energy.  And just think going back to 2001 when oil was at 18 to $20 a barrel and then it was 30 and then it was 40, then it was 50, and then it went from 50, jumped to 70 with Katrina and Rita, came back down into the 60s, went back up into the 70s, came back down in the beginning of the year; and look where we are today on this Friday, we're talking about $95 oil.  So the most rapid rise appears first in the prices of energy.  That's followed by food and shelter and raw materials.  And these are the items that are most heavily in demand during a period of population growth.  And the most visible sign of this is the rapid rise in the price of energy. 

And Fisher documents a lot of this in the various inflations throughout history.  One of them which he talked about in his book was in the 13th and 14th century.  We had a great wave of inflation that hit the planet at that time.  During that time [the inflation in] the source of energy is what happened to the rise in the price of fire wood and charcoal.  So in each one of these eras of inflation, these common characteristics are present in all of them.  And in every single case it begins with energy, goes to food, shelter and then carries over into the rest of the economic system.  [8:54]

JOHN:  What follows after that anyway?  So assuming that it starts with energy –because you can see where energy sort of drives everything in a culture, at least especially in modern culture.  And so as it rises everything else is going to be forced to rise upwards with it.

JIM:  You need energy to do anything.  If you want to produce something, whether it's food or manufacturing widgets, you use energy. So as that price rises, then what follows is the price of food [rises] because it takes energy to produce food.  It takes the fertilizer that comes from natural gas, the diesel fuel that's burned in a tractor or in a combine when you're harvesting.  Then the products are stored.  That takes energy to store them.  They are put on trucks and then they are sent to manufacturing plants where the food is processed. Then they become finished food products, put on a truck, they get to the store where they are refrigerated.  So energy is involved in all of that process.  But what follows after energy is a rise in food and that's exactly what we're seeing today.  I don't care whether you're looking at any kind of food category, grains, meats, dairy products that's what we're beginning to see now.  [10:07]

JOHN:  You know, there's a monetary side to this whole equation that interacts with what you're talking about in the commodity side.

JIM:  Sure, because it feeds into it and it enables the price rises.  As demand for goods increases, their price goes up, money comes in there, and governments create more money.  And especially if you take a look at historical patterns with increased trade –or today, globalization and the fiat monetary system that we now operate in – there is a lot more money that's in circulation.  And just think of MZM, which is growing at over 20%; M3 in the US, which is growing at close to 15%.  This added monetary inflation when added to demand inflation causes prices to keep rising.  It also increases the velocity of money and circulation.

And along with that increased velocity comes increased volatility, which is exactly what you're seeing today.  I mean just look at the selloff on Monday, the rebound on Tuesday, the selloff the next day.  So one of the things that come in in the latter stages or the terminal stages of inflation, is not only increased velocity but also increased volatility.  And we're already beginning to see that right now.  That's one more indicator of the phase we're in right now.  [11:30]

JOHN:  Strangely enough, that reminds me of a process that builds a thunderstorm.  As long as there is an adequate supply of water, which in this case would be flooding money, the process begins self-fueling and actually reinforces itself and keeps ongoing.

JIM:  This is now what is coming into play.  You're seeing high prices increase demand for money.  When demand is met by increasing supplies of money as we're seeing today, you begin to see a growing increase in money velocity and prices are driven even higher.  We're about to enter this next stage in my opinion where velocity begins to increase.  And that's why the Fed pays so much attention to that Inflation Expectation Index.  Think of that Inflation Expectation Index as an index I call maybe the velocity index.  Because when people believe that inflation is going to increase more in the future, then you start to see an increase in turn-over.  In other words, why hold on to cash:  “I'd better buy something now because it's only going to cost me a lot more in the future.”  And so you see hoarding and you see money turn over.

And that’s why the Fed talks so much about it.  In many of the Bernanke speeches before Congress, you always see the Fed Chairman making reference to this index.  [12:55]

JOHN:  You know, we always hear the talk about social inequalities.  A lot of times you hear it in terms of the income tax meaning why we have to have a progressive income tax because that's supposedly more fair.  But we find in this time of inflation there’s one very fixed phenomenon that seems to occur.  The rich always get richer, the poor get poorer and there is sort of a split in the middle class.  Most of the middle class go over the edge into poverty.  As the cliff is crumbling under them, a few manage to scramble back to firm ground and go up with it to actually survive.  But generally, the middle class is the one that disappears in the midst of the of all of this.  Why is that? 

JIM:  Well, just take a look at it.  As inflation increases in the system, let's say you're a middle class family.  That means the basic necessaries of life – food, energy, services, education, visits to doctors – all of those costs start to go up.  But think about your job.  Unless you get a promotion where you get a major salary increase, most people are going to get a cost of living increase at the end of the year.  Well, if we have a CPI index that is grossly understated and inflation is running at 10%, but we're reporting the CPI at 3%, you're going to get a 3% cost of living increase.  That's probably going to put you in a higher tax bracket so you even get to keep less of that increase.  And it's taxes and inflation that are going to eat up most of your purchasing power; and you're just having to run harder to make ends meet. 

Whereas if you have discretionary income or you have an asset base you can always make investments that profit from inflation.  You can go into gold or you can go into energy.  But you have the ability to profit from an inflationary increase whereas most people that are working, salaried people, get hit with taxes and inflation. 

I think back to the time when I was growing up.  I come from a large family: ten kids – five boys, five girls.  My dad was just basically a cabinet maker and he supported a family; my mom stayed at home and they even had enough extra income where they could make investments in real estate.  That's because the dollar had a solid backing and we weren't inflating the currency the way we're doing it today.  If my dad was to start a family today given his profession, having ten kids, there is no way my mother would have been able to stay at home and raise 10 kids.  I mean you look at most families today; it takes a husband, a wife both working – and that's what happened as a result of the 70s when we abandoned the gold backing of the dollar and governments were allowed to inflate at will.  That’s because there was no longer any incentive to balance to balance the budget and there was no restraint placed on government and its ability to inflate.

So what happened?  The wife went to work in the 70s.  In the 80s our savings rates began to decline.  People saved less.  That was one way they were making ends meet.  In the 90s, not only did they stop saving, but basically people were making money with the inflation in the paper assets.  And in this decade, not only did it take two spouses and no savings but people substituted debt.  So this just goes to show you that progression of an inflation as it works its way through the system with increasing inflation and taxation.  [16:33]

JOHN:  Well, obviously when this pops up on the radar, the middle class becomes aware that something is going definitely wrong.  They find it harder and harder to make ends meet.  I interviewed a lady recently who used to be with the Treasury Department who has done a book on how the middle class can budget more; they can do this percentage for this and this percentage for that.  I finally asked her a question.  I said okay, you've got this middle class family, they make, for example, $5,000 a month, but they need $6000.  I said what do they do now?  She was absolutely silent.  I said, “See! that's what they are facing.”  Your little book is nice and cute, I told her, but it doesn't do anything for the middle class; right?  That's where they are stuck in there. 

Now, the second part of this problem is this is a government-caused phenomenon, even assuming in our country where the Fed is a private banking system, but it still operates under the auspices of Congress.  Let's face it.  And as a result of that and the politicians who (once people begin to get upset about this) are not willing to take the rap for having caused it in the first place.  So the people, not understanding inflation, turn to the politicians and say, “Do something!”  And then the politicians come in and they promise them all sorts of goodies and candies which can only be paid for by higher taxes or more inflation.  They actually fuel the cycle, as it goes around the loop.  [17:53]

JIM:  And you know, this creates all kinds of social inequalities and you're seeing this today.  A growing gap between, for example, the returns to labor and capital.  And with it, you're seeing this rapid growth of inequality as a consequence.  And John, this begins to appear in the latter stages of every long inflation in history. 

Just look at the political parties today and especially this election cycle.  The candidates are making even bigger promises to the voters, government health care, free college, savings accounts of up to $5000; and it's all going to be promised by taxing somebody else.  Here we get to the free lunch concept. 

The tragedy and it really is one, is that all of these promises are going to come at a huge cost to the majority of the population.  And that cost is going to be the demise of the dollar and its purchasing power, the end of much of our freedoms, poverty for the bulk of the population and hyperinflation.  You're also going to see an increase in incivility within society – and you're already beginning to see that right now whether you're looking at politicians or society in general.  You're also going to see respect for the law diminish, and a major increase in criminal violence.  Just turn on the evening news and you're already seeing much of that.  [19:23]

JOHN:  So sort of as a review here, much of the patterns that we're speaking of right now, historically can be found again.  We say that history doesn't repeat but it does rhyme – we're pretty close to rhyming right here.  It seems to go down this whole trail.  First of all we see rising energy, because rising energy affects everything in the culture.  Then that's followed by rising food prices.  These are life's necessities and the middle class can't do anything about it.  They have to pay those, period.  That's all there is to it.  They have to get around;  They have to heat their homes, they have to eat, etc.  People don't understand it, they turn to government to say, “help us, oh great government,” oblivious to the fact that government created the problem in the first place.  And the politicians come in with all sorts of promises of a free lunch.  But the problem is that somebody has to be to blame for the rising energy prices, the rising food prices.  So now the blame game, or what you and I call off-loading, begins.  And that's already under way.

JIM:  Sure.  And we saw that as energy prices went up.  It was the oil companies.  You're hearing a lot of talk in this election cycle:  It's rich folks, from hedge funds managers; It's OPEC.  They never mention one reason for food prices rising is because of a government mandate to use corn ethanol which has removed 25% of our corn production and diverted it into ethanol production, which is totally inefficient.  But you're right.  The government never owns up to the consequences of its decisions and especially its inflation policy.  They always look for someone else.  And you can see this when the Fed Chairman is up there, they talk about there could be some inflation coming into the future because energy prices are rising.  See, right there, they are off loading it on to – “it's not what we're doing, it's rising energy prices.” Or they'll look for some group to off load the inflation cause on to.  And this gets more towards the terminal stage of inflation when they are talking about businesses raising their prices so people begin to think, “oh, it's not inflation, it's these greedy business people raising prices that's causing inflation.” 

So they always have to find somebody to off-load it on and there are very, very few people in Washington that really understand this.  Ron Paul is probably one of the few that understands this.  That's why he chastised the Fed Chairman last week to sort of put this in perspective.  We played this clip last week, but let's play these back to back.  Play that clip of Ron Paul talking to the Fed that we have an inflation problem and your remedy is to treat it with even more inflation.  And then play on the back of that Steve Liesman’s comment that Ron Paul's economics leave something to desire.  Steve is someone who believes everything he reads.  [22:14]

RON PAUL:  What is the advice that you generally get?  And that is inflate the currency.  They don't say inflate the currency.  They don't say debase the currency.  They don't say devalue the currency.  They don't say cheat the people who are saved.  They say lower the interest rates.  But they never ask you and I don't hear you say too often – the only way I can lower interest rates is I have to create more money.  I have to lower the discount rate.  I have to make it generous, I have to increase reserves.  I have to lower the interest rates and fix the interest rates, overnight rates, and the only way you can do this is by increasing the money supply.  And I see this as the problem that we don't want to talk about.  Currently of course, we can't follow money supply with M3, but we can follow one of your statistics which is MZM, the ready cash available, and we see that inflation is alive and well.  It's – that money supply figure is going up about 20%.  And 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 the supply of money with more inflation?  [23:31]

JOHN:  Now, that was the interchange between Ron Paul and Ben Bernanke.  As soon as they came out of that, then you had Steve Liesman at CNBC saying the following.  This is a must here as well:

STEVE LIESMAN:  I mean Ron Paul's economics really leave a lot to be desired.  He talks about people having their savings wiped out because the dollar devalued.  I think Ben Bernanke, the Fed Chairman, correctly points out that it is due to devalue if all of your saving...if you're spending all of your money abroad, that it's domestic prices that matter.  I also think that Rick is wrong.  I think 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. 

JOHN:  Yeah, put him in the DNC.  I don't mean Democratic National Committee.  That is “does not have a clue” category on this whole thing, because Ron Paul had very carefully targeted what is the cause of inflation and that is we keep inflating the money supply.  The problem stops as soon as they stop inflating.  But they won't do that because there are other ramifications entangled in that.  But, you know, there is that difference in philosophy we always talk about:  The difference between Keynesianism and sort of the Austrian view.  And if you're raised in a Keynesian school, you view the solutions as being more and more tinkering; inflation is not caused by monetary increase in the supply.

JIM:  You're absolutely right, John, because if you go to a government school and even a private school today, you are taught Keynesian economics.  So when you see rising prices, which are the symptoms of inflation rather than the cause, everybody talks about treating the symptoms.  And it's always more tinkering as you pointed out.  But here is the problem.  Every professor at a university is a Keynesian, so people go to school, they are taught Keynesian economics.  They go out, get a job, they go to work in government which reinforces the view that hey, you got a problem, that means more tinkering by the government.  And Wall Street is pretty much the same view too:  “You got a credit crisis, give us more money.  You got a problem in the economy, give us more money.”  And they never talk about the root of the problem, which is money creation itself.  And there is only two colleges, I think...

JOHN:  Hillsdale.

JIM:  Hillsdale and Auburn University that teach Austrian economics.  I mean let's say you graduated from Auburn University or Hillsdale, you've got your PhD and you're an Austrian economist.  John, you're going to have a hard time getting a job at a university.  They just don't tolerate that.  So unfortunately, when everybody is brainwashed with this kind of thinking that's what happens.  You have a crisis and what do you hear from Wall Street?  What do you hear from government?  “We've got to tinker, we need more money.”  [26:15]

JOHN:  You know, by excluding food and energy from the inflation reports with the media either in total ignorance or collusion –you have to figure out which way that's going – and they are always talking about the symptoms, if you notice that: “ Inflation is really the rise of prices rather than the increase in the money supply.”  This is really a losing battle because unless you can explain to the public what the problem is, they don't understand, so they keep opting for the wrong solutions which is usually to appeal to their Congress critters who then just start another round of tax and inflation and regulation and promising free lunches, which by the way nobody ever seems to notice they really don't deliver on.  They are delivering less and less and now if you listen to the presidential debates they are promising things that they just can't even deal with.  That's the systemic issue, right, out there. 

Personally, though, once you realize the system now is almost on a free run of its own, it's not coming back.  At least personally, I would think you could understand what is going on and do what you can to prepare.  If you understand the mechanisms you can make certain strategic moves with your job, with what you're doing, understanding how these patterns are historically, what jobs will survive, what won't; what incomes will survive, what won't; where going to protect your money. 

Well, I'll be honest with you.  It's going to be a little dicey out there.  Look at the bail outs, as a matter of fact, you were talking about recently.  Look at the bail outs that Bill Gross wants; more government intervention to bail out the mortgage and credit mess.  Investors need to protect themselves.  Everybody wants the central core government to bail them out of stuff which they have no risk encountering.  And they off load the risk of that to the people who never stood to gain from it.  [27:53]

JIM:  So as the system gets terminal, John, and that's what we're in, we're in the terminal stage.  When you see the money supply exploding globally and it's not just here, it's a point that I differ with some of my fellow peers, this is not just a US phenomenon, it is global.  And you see the demand for food, water, energy exploding at the same time, supply is struggling to keep up or it's actually shrinking.  The world is inflation bound and especially after decades of disinflation, which are lower rates of inflation – basically the 80s and 90s, most of the inflation went into paper assets.  So what I think you're seeing and you're going to see it going forward: Inflation is going to return with a vengeance.  And where we're at today is a major turning point or an inflection point in economic history.  All of this is going to benefit resource stocks from energy, precious metals, food and water.  I mean just look at the performance of the sector over the last five or six years.  It's also going to benefit companies that can facilitate supply and build the energy super structure; the same thing with food and water.  And of course as prices rise and money dies and loses its value, the value of precious metals is going to sky rocket.  [29:17]

JOHN:  And you're listening to the Financial Sense Newshour at www.financialsense.com.  By the way, we would like to get your opinion on something.  That means you, persons who are living, if you go to our website at www.financialsense.com, there is a Financial Sense redesign survey.  We're trying to redesign the website and we'd like some input from you as to what you think we ought to do with it.  These are little things you check off in boxes, it's pretty easy to do.  Jim, do we list body parts and family members like that as well so we can check those off? 

JIM:  No.  That's excluded from the survey.  But what we're going to do is we're going to redesign the site, we're going to add more content. We have some ideas internally, we're really going to bring a lot of research and information.  But what we want to do is put your input to it because we have ideas in our mind, this is the kind of information that people need to know about, these are the charts, these are the tables, these are the stories, this is stuff people really need to follow.  So those are some of our own ideas.  But what we'd like to do is hear from you, and if there is something in particular you don't see on the survey, just email us and say, “Hey, Jim, I wish you guys could cover this or add this kind of content or I'd like to see this.”  And if we see a lot of demand for something, that gets our attention and we'll try to incorporate that into the redesign.  [30:41]

JOHN:  And if you'd like to find out about investing with the PFS Group, go to our main website www.financialsense.com, and click on the area About Us and there is a lot of information there.  Financial Sense Newshour with Jim Puplava and John Loeffler will be back in just a moment. 

 FSN Humor

Fed Chairman, Bernanke:  All right.  All right.  Order everybody.  Meeting of the open market committee for this quarter will please come to order, please.  Hope you're taking minutes over here, madam.  Thank you very much.  First item of business, as you all know, we've been getting some flak about not having transparency in these meetings, so we're going to take this little token photo here to release to the press.  That should take care of the transparency kooks.

Fed Governor:  Hey, Ben, isn't that a little risky though? 

Bernanke:  Nah.  We don't think so.  Okay, everybody, smile and say dollars.

All:  Dollars.

Fed Governor:  Gold.

Bernanke: I heard that.  That wasn't funny.

Fed Governor:  Sorry. 

Bernanke:  Now, onto the business of raising interest rates.  Madam Pecunia, how are you doing?

Mdm. Pecunia:  I'm looking deeply into the M3 money supply.

Bernanke:  We don't talk about that anymore.  It doesn't exist.

Mdm. Pecunia:  But I can still see the M3 aura on the economy.

Bernanke:  Look, Madam Pecunia, just tell us:  Should we raise the interest rates or lower them? 

Mdm. Pecunia:  I see interest rates going up and I see interest rates going down. 

Bernanke:  Oh, good.  That tells us a lot.  So which one is it? 

Mdm. Pecunia:  What?  Do you think I'm a psychic.

Bernanke:  Well, keep trying. 

Michael, how are you doing? 

Michael:  Two snakes and a six. 

Bernanke:  Why don't you just flip a coin? 

Bernanke:  I don't have coins anymore.

Bernanke:  Why not? 

Michael:  The metal is worth more than coins now, so that's only for scrap.

Bernanke:  Great.  Does anybody else know about this? 

All:  Nah. 

Bernanke:  Well, keep it that way.  Look, everybody, I told Congress that we're data dependent, and dog gonnit, we're going to come up with some data.

Bernanke:  Excuse me. 

Fed Governor:  How did you get in here?

Baby boomer:  I'm a baby bloomer and I was wondering if you guys could arrange it so we can stop inflating the dollar so we can retire with our Social Security and pensions at full value and not have our golden years wrecked by your overinflated dollars?

All: [raucous laughter]

Baby boomer:  Sorry.

Fed Governor:  Hey.  There is a microphone at the bottom of my coffee cup.

Fed Governor: Yeah.  Mine too. 

 Behind the Numbers: What they never tell you on cable

JOHN:  One of the comments we quite frequently hear coming from the Fed, I guess, notably Ben Bernanke, prior to that Alan Greenspan, is that they are data dependent.  And the markets seem to live and hang on every economic number that comes out.  Is the economy okay or are we heading toward a recession? And probably it even depends, Jim, from whose point of view, the middle class or those people who are having fun throwing all of the paper around on Wall Street.  The economic reports are supposed to answer these questions, but that doesn't seem to be what's actually happening.  So what's going on out there? 

JIM:  Any kind of economic number you look at today – GDP, CPI, unemployment numbers or other economic reports – they are either over or understated; or there isn't much depth to a lot of these reports in the analysis that you see on.  Let's say if you're on the cable channels, the numbers come out and they'll say, “a lot of jobs created.”  And they don't talk about the birth-death model, they don't talk about the personal household survey which is diverging from the headline survey.  So it's like there is a bias there.  There is a number, “Ah! that's a number, okay, we can sell that number.”  So they are always trying to sell something rather than dig deep into the numbers and tell you this is really what this number means; or this is when you look closer on the surface, the number looks good, but the closer you look, it doesn't look as good.  [34:22]

JOHN:  Okay.  That sounds good in theory.  Let's go to some examples so we concretize this in people's minds.

JIM:  Okay.  Let's begin with the job numbers, which is the mother of all economic reports.  It's supposed to tell you how well the economy is doing.  If the economy is growing then you would expect to see a lot of job increases.  And if you look at the headline number, it tells us the economy is very strong with 160,000 hypothetical jobs that were created last month.  But another survey, the Household Survey shows a loss of jobs at 250,000, so the Household Survey is probably closer to the truth in terms of what's actually happening in the real economy.  I mean Chrysler is laying off 10,000 workers and look what's happening to the financial industry, the real estate industry, the mortgage industry, the banking industry, the brokerage industry, if you take a look at the credit derivatives department and training departments at a lot of the major brokerage firms, a lot of these people are getting laid off.  They are getting laid off in the financial intermediary industry, they are getting laid off in the construction industry.  So a lot of the numbers that we report just don't seem to add up with what you’re actually seeing in the real economy.  [35:36]

JOHN:  Okay.  So by household survey, I'm assuming that you're saying that they actually dial up.  So you have a polling group call up and call X number of households to see how things are doing and they just talk to people in the households; right? 

JIM:  Yeah.

JOHN:  Okay.

JIM:  That's probably going to give you more accurate input in terms of “okay, here is our model and theoretically the birth-death model all of these small businesses which we can't poll should be creating all of these hypothetical jobs. [36:01]

JOHN:  So this is what I call a wet finger analysis.  They just wet their fingers, stick it up in the air.  You mean the birth-death model doesn't go around and count noses? 

JIM:  No. 

JOHN:  Okay.

JIM:  It's an interesting comparison because usually when you come out of recession, the birth-death model tends to understate the amount of jobs.  The Household Survey tends to lead coming out of a recession.  Then when you get towards the tail end of an economic boom what happens is those two surveys tend to reverse themselves because statistically what statisticians are now doing is they are taking a look at the growth in jobs that we actually experience and then they tend to extrapolate that going forward even under the surface.  The household survey may say, “hey, no, I lost my job.”  And so they tend to lead and lag at different times.  [36:51]

JOHN:  Okay.  So as I understand it, then, and tell me if I'm right or wrong here, these jobs that are theoretically created, you know, the president says, “oh, we created so many jobs” or somebody in Congress says that, but 80 percent of these are what?  Fictitious?  Real? 

JIM:  They are estimated.  If you take a look at the job number that was reported for the month of October, we created 160,000 jobs, they revised the August numbers from a 4,000 loss to I think 80,000 plus jobs created, but buried in that report is they said, oh, by the way, the March numbers over stated jobs by 300,000.  So, you know, just a little bit of a problem here.

So that's the problem when you're going through an economic slow down and possibly into a recession, the birth-death model is going to overstate the jobs created whereas the household survey tends to be more accurate and reflecting what is really going on.  So there is a lag there between those two.  [37:45]

JOHN:  About 70% of the GDP, meaning the way it's calculated is made up of consumer spending, so if we were to look at that, what are the retail sales telling us about the consumers’ financial conditions?

JIM:  Well, if you take a look at the sales numbers, they are in a definite slow down and they've been that way since the beginning of the year and last year.  And that has been the picture since January.  That trend is now beginning to worsen as we see for example, rising food and energy costs, which consume more of a household budget; higher interest rates on the mortgage resets, that's intensifying.  

But I think more importantly is what you find when you dissect the retail numbers.  This is what I find is interesting.  Most of the categories within retail sales were declining.  Where we saw increases was also very revealing.  Food and beverage sales are up, mainly grocery stores, along with gasoline stations – going back to the food and energy inflation theory that we talked in the first part of this segment.  These increases, John, reflect higher inflation numbers at the pump, higher inflation numbers at the grocery store; two categories of inflation, once again, that we repeatedly ignore when we report on inflation.  So if you look at all of the categories of retail sales, they were actually much weaker than the numbers would reflect because the two areas that had robust growth – and I think this is just as a result of inflation – are gas station sales and grocery store sales.  [39:25]

JOHN:  Yeah.  But if we go to the talking heads on the tube, they are saying there is no inflation.  So the question is:  Is it moderating or firmly under control, or are we really riding a reckless train here?

JIM:  Well, you know, another piece of evidence if you take a look at what's going on in the economy and getting to this retail number is that the transportation numbers don't match up with the retail sales numbers.  And that's why, I think the retail sales numbers are more inflationary than what we are reporting.  If you're selling stuff, then correspondingly you should see increase in transportation.  In other words, the boxes are moving.  If you're selling a lot of stuff in the store, then that means the boxes are coming out inventory, put on a truck, put on a railroad car and you should see increased shipments.  But that's not what we're finding.  I don't care anywhere you look in the transportation system, truck tonnage, rail car loading, states sales tax receipts, the trade deficit data on lower imports all point to weakening consumption patterns. 

In fact, the American trucking association, their truck tonnage index is down 3% from a year ago.  I have three brother-in-laws that are in the transportation industry, two are in the trucking industry and one has a company that finds independent truckers to carry loads.  And my two brother-in-laws tell me that business is definitely slowed down, the other brother-in-law in the dispatch business told me there has been a definite slow down.  And if you take a look at something called the Cass Freight Index, that index peaked in June of 2006.  And the Cass Freight System deals with almost 1200 divisions of 400 major companies representing a wide swath of industries.  So it really gives you a good feel for the ebb and flow of goods being shipped and there is a definite slow down in the shipping business, which I think is corresponding with a definite slow down you're seeing in the retail sales numbers.  And only thing that is keeping the retail sales numbers in my opinion are inflation.  [41:34]

JOHN:  So basically what you're suspecting is that the retail sales numbers are much weaker than reported?

JIM:  Yeah.  I think the volume of goods is down and the value of those goods has been rising because of inflation.  And this also lines up with sales tax receipts being down.  Now, here in California, there is no sales tax on food items.  It's exempt from sales tax.  So you have grocery sale stores that are up, but a lot of that is exempt from sales tax. But department stores and discretionary spending and store sales are down, which explains also the drop in sales tax revenue.  So if retail sales were strong, then you would expect to see rising sales tax revenues to the state.  That's not actually happening and that's because the strongest segment of the sector is grocery store sales and a lot of that is being exempt from sales tax.  [42:28]

JOHN:  Well, this sort of brings us back in a circle to your inflation thesis that we discussed in our previous topic.  I know you've been a strong proponent over the last couple of years that the inflation numbers are bogus.  I just make it easier, Jim,  I say all of the numbers are bogus.  That saves me having to think about it.  Okay?  But let's go back to inflation and in fact it is really grossly understated.

JIM:  Right.  They are not only grossly understated.  But, John, even the headline numbers is understated as they are, they are rising.  Wholesale prices are up 6.1% year over year and even the core wholesale prices are up 2 ½%.

JOHN:  I thought the PPI numbers reported this week were a tad low.

JIM:  If you were to believe what was reported, the main reason the PPI number was low was that producer prices for energy – you’re going to  love this one – fell nearly 1% last month, reversing a 4% jump in the month of September.  According to the index, gasoline prices were down 3.1%, food prices increased only 1%.  So all you need to do is just look at a chart of the energy complex since mid-August.  I don't care whether you're looking at gasoline, oil, heating oil, they've all gone basically vertical.  And I expect energy to keep rising along with food prices the remainder of this decade.  So you may exclude these items from economic reports, but we're going to have to live with them and adjust to them.  And for many in this country this is a fact that's going to be a very painful one.  [44:04]

JOHN:  That's been probably the core issue is the fact that although the prices are saying one thing, the talking heads are saying one thing, what people are really feeling is a different thing.  That creates a tremendous amount of dissonance which creates that social unrest because at some point people say, “I don't care about your blather.  We're in terrible shape.  Do something.” 

JIM:  And that accounts for a lot of the cognitive dissidence that we're hearing today where you turn on the cable channels and it's all happy talk.  The economy has grown at 4%.  We're creating a lot of jobs and inflation is low.  And then people are saying, “Wait a minute, I lost my job.  I'm having a hard time making ends meet.  Even if I have a job.  We're struggling to pay our bills each month, I'm having to resort to credit card debt.  We're struggling right now, and you're telling me that everything is beautiful.”  I think maybe if they can't figure it out, they just know in their own circumstances, it doesn't line up with what we're being told. [44:58]

JOHN:  And you're online with the Financial Sense Newshour at www.financialsense.com.  We are IPod friendly and we'll be back in just a minute. 

 Capital Controls / Dollar Devaluation Where will those dollars go?

JOHN:  You know in the ups and downs of everything, Jim, as we think about it, when you talk about the dollar devaluing, when you talk about the guy on the street, they don't really understand that.  They don't understand how money increases or loses value or what this means to them.  It's sort of one of these dark, esoteric type of situations.  We were talking about credit crisis this year, but in reality, the dollar devaluation is a crisis all of its own – related, but all of its own.

JIM:  Absolutely, John.  I mean if you take a look at where the dollar was in January, where it was around 86, we're now looking at roughly below 76.  And it's amazing because when you saw the discussions last week, whether it was Bernanke around the cable channels, you know, the idea was when the Chairman was questioned about the dollar losing its purchasing power, it was like, “well, it doesn't really matter if the things that the buy are in dollars, it doesn't make a difference.”  Forget the fact that almost everything you see in a department store or retail store comes from overseas.  It's not made here.  And so I've talked to clients who have done traveling.  One of my larger clients went to Europe this summer and he took his whole family.  This is a guy that travels all year and so does a lot of traveling.  He said it was amazing to see what happened to the purchasing power of the dollar and how expensive is it was for him to go to Europe. 

And so, you know, there are consequences to this dollar crisis that we have.  We're going to see it in higher prices domestically.  Even China has inflation today.  And there is something is that once again, just like the food and energy inflation numbers, “the dollar is losing value, it doesn't really matter much.”  It's dissonance.  It's just absolutely amazing that all of this stuff that's going around on us that's creating this economic pain, the inflation, is routinely basically thrown out the window – “oh, don't pay attention to that.”  [47:20]

JOHN:  Last week, remember that row with you and Peter Schiff.

JIM:  It was kind of fun.

JOHN:  I actually sat here and enjoyed the whole thing when it was going on.  Anyway, central banks and governments elsewhere in the world, they are watching the free fall of the dollar, no parachute, no safety so far, they are getting concerned that it's beginning to hurt them.  They can't let this go on, so what are their options right now?

JIM:  It's amazing they keep responding in terms of, “hey, we're not going to let you get away with this because it is starting to hurt the European economy.”  The European economy is beginning to slow dramatically.  Japan's economy is extremely weak and Japan is threatened.  They may intervene if necessary; and they left their interest rates unchanged this week and it's one of the reasons the yen sort of depreciated a little bit.  But what you're starting to see and the first response from central banks is they are looking at capital controls.  [48:14]

JOHN:  Capital controls is one of those terms that nobody understands.  Are we talking about fact that they are not going to let money out of from somewhere, typically borders from out of a country? 

JIM:  No.  It can also work in the reverse.  In other words, they are not going to let money in.

JOHN:  Okay.

JIM:  So you're seeing central banks from Bogota to Mumbai are imposing foreign exchange curbs to take control of their soaring currencies, because they are worried about traders dumping the dollar. So everybody is sort of scattering out of the dollar and there just aren't a lot of places you can go into today.  You can go into the Euro, look what's happened to the euro's appreciation.  That's impacting the European economy.  You know, it can go into the Canadian dollar.  I mean CNBC sent one of its reporters this week to Vancouver and talking about that for every one penny that the Canadian loonie appreciates against the dollar it costs them something like $250 million in trade. 

And the Canadian finance minister last Friday (that was the Bloomberg article I was citing) said, “you know what, our expert balance is really starting to decline.”  So what they are trying to do here, John, is they are trying to set up obstacles to keep the failing dollar from threatening their own internal economy and economic growth.  And they are struggling to find new ways to intervene against their currencies; and some of the proposals, you know, quite honestly simply aren't going to work.  I mean if you take a look at it, the dollar has lost about 20% against the Canadian currency this year, and 18% against Brazil's real.  So, you know, the problem that we're seeing is what they are trying to do right now is use sort of these regulatory-type moves to prevent from having themselves inflate because they are already inflating as they are right now. 

As I talk about on the show central bank money supply growth is double digits as you look around the globe today.  Even in Canada, money supply growth is around 8%, so they are trying these other measures and it's amazing.  For example, in the BRIC countries and the emerging markets where a lot of this money has been going, you have for example in Columbia, whose stock exchange fell 20%, the finance ministry is imposing controls on short term capital.  They began this in May by requiring foreign buyers of their stocks and bond to deposit 40% of their purchases with the central banks for six months.  So they are saying, “hey, if you want to come in, we're going to place restrictions on you getting out because we don't want to see what happened to Asia in 97.”  That’s where the hot money comes in and then, you know, it's no longer hot and then six months later, the hot money is moving out.  So they don't want to see these big currency crises.  So the currency controls are sort of keeping a lot of these foreign investors on the side line.  And in Mumbai they've adopted measures in the month of October to bar funds from investing in Indian equities and imposed investment caps and deposit requirements.  And so what they are doing right now is trying non-interest rate methods to stabilize growth and capital flows. 

And if this doesn't work, then the next thing they are going to do is they'll try with loosening money.  Wait until the Euro gets to a buck fifty against the dollar; and you're going to really see this bring economic pain to these countries.  And they are going to respond because that's what the political leaders are saying.  And you know, in the month of August, European Central Banks injected nearly $300 billion into the system as their credit system began to freeze up.  So this idea that they won't inflate, don't bet on it because the money supply figures speak differently.  [52:01]

JOHN:  A little bell goes off and goes, ding, time to inflate.

JIM:  Or time to inflate more. Yeah. 

JOHN:  We always talk about the herd going in the wrong direction.  We have all of this contrarian sentiment lining up on one side of a trade, could this result in dollar bearishness, but I guess the – why is it we always wind up on the other side?  Have you figured that one out yet.

JIM:  If you look at the dollar bearishness out there and what has happened to the dollar, one can argue from the contrarian perspective that it's time for a dollar rally.  And at some point, John, we are going to get a dollar rally.  But it's not going to be because things have suddenly gotten better in the United States that the credit crisis has gone away or that economic growth is now accelerating.  What you could get is a dollar rally not because things are going well but because things are starting to go wrong elsewhere with the European economy, with the Japanese economy.  Or you could see some kind of credit crisis develop in Europe and the UK or elsewhere, because remember, this is a global phenomenon this credit bubble that we're in.  See right now the epicenter of this crisis is centered in the United States, so that's why the money has been money fleeing the dollar and going elsewhere.  And that's because the better perception is everything is hunky-dory every place else in the world.  But if problems begin to develop, as you're seeing in Japan, as you're seeing in Europe and as account surpluses begin to dissipate or their economies begin to slow down.  I mean Europe is almost reversing itself.  The reforms that Germany tried to put in place with labor and taxation in Germany now are being reversed.  They just increased their VAT tax, so Europe is going in the wrong direction and that's going to lead to problems there.  So if we get a dollar rally, it will just mean because things have gotten worse over there.  [53:59]

JOHN:  Okay.  Well, this creates a problem, though, because say people are looking for safe haven from the dollar, which I always maintain was going to create a problem for us because if dollars begin flooding back to our shores, that would really just goose our inflation up even higher.  But all of that aside, say you're going to look for safe haven  There is the pound, the Euro, the Yen, maybe a couple of other candidates.  They really don't have the base that you would need to absorb all of that.  So that's creating a problem as well.  There is no substitute right now for the dollar.

JIM:  No.  In fact, even the China's officials say the dollar is still going to be one of the main currencies out there.  It's just is that central banks are diversifying.  The problem is that you have is right now not all of that money that can move out of the dollar can move into Euros, pounds, Swiss franks or loonies.  And to give you an example:  Because it's been called a petro-currency, the Canadian dollar, a disproportionate amount of these dollars that are moving out have moved into the Canadian dollar and look what it's done.  It's gone up nearly 20% against the dollar.  And it's really start to go hurt the Canadian economy.  I wouldn't be surprised if you see GM in the future close down its Canadian plants. 

So it's got to find a home somewhere and there is a little bit of an indication of what's maybe coming and that's the sovereign funds where these central banks are setting up these investment pools are saying “hey, we know money printing is going around, we know there's inflation all around.  But you know what, we're going to take some of these dollars that we have and we're going to redeploy them into hard assets.”  So I think you're going to see another drive that is going to go into the resource sector – whether it's energy, base metals, precious metals, hard type assets, infrastructure type assets – because investors are going to need an inflation hedge.  And that means the commodity stocks, the resource stocks, I think are going to be a home for a lot of this money. 

That’s because let's face it, any time there is a crisis around the globe, what do central banks do, what did the European Central bank do in August?  They injected $300 billion into the system.  We injected nearly half a trillion dollars between August and September.  And the Fed is still injecting money into the system as are other central banks.  So this hasn't stopped yet.  So the question is with all of that money going up there, it's going to find a home.  And my bet is it's going to drive the next phase of the resource market. 

But in summary, what we're seeing happen right now is central banks are using sort of non-traditional methods, capital controls, very similar to what happened in the 70s in Switzerland as money was pouring into Switzerland because of the dollar's depreciation.  The Swiss banks charged you interest to put your money in the bank instead of paying you interest in order to sort of keep money from coming in at a high rate.  They actually charged you an interest rate.  And that's what central banks are doing right now.  They are trying non-interest rate methods to try to stabilize growth and capital flows as money seeks a safe haven. But I think eventually, we are going to see, I don't know what level, if it's 71 on the Dollar Index.  Who knows what that number is going to be.  

But if we do have a rally it's going to be because of things worsening elsewhere because I expect the Fed to continue to cut interest rates as we've talked about in the last segment.  Everywhere I look, all of these economic numbers are weakening.  And it's been a broad trend, a consecutive continuous trend of weakening, and the credit crisis as John Bain [phon.] just talked about this week, it's going to get worse.  And we're seeing a lot of that on Friday with Fannie Mae biggest two day decline since 1987.  So you know, the credit crisis hasn't gone away, the economy is weakening, there are a lot of stuff going on and that's why I think the Fed has got to maintain its inflation image even while it injects money into the financial system.  But they are going to inflate.  [58:08]

JOHN:  Yeah.  But what you're talking about right now so people understand too is the fact that we're on this big carousel and you're describing right now one side of the carousel.  Now, keep your eye on the guy with the ice cream cone there because we're going to see him again on the next time around, aren't we?  We're going to keep in the cycle? 

JIM:  Absolutely.

JOHN:  That's the end of this first hour for the Financial Sense Newshour Big Picture www.financialsense.com.  We try to keep you calm during all of the chaos out there, which is why we call it dot com.  I think that's an equivocation isn’t it.  We'll be back with more of the Big Picture with Jim Puplava and John Loeffler right after you go away and we come back.  Bye bye. 

 Part 2

 They Still Don't Get It

JOHN:  Well, here we are back into the second part of the Big Picture for today.  We do have Q-lines coming up in a later segment after we get done with some of the things we're discussing right now.  We have a couple of other issues.  One of these I've noticed, Jim, is it's amazing how much a person's world view or ideology overwhelms what they are able to see.  I mean there have been times when you – when blaring proof is standing right in front of somebody whose opinion it contradicts, and they are still trying to find ways of explaining around.  And you finally just blurt out, “you really just don't get this; do you? You've been sort of shot out of the sky on this one and I know you're wondering why your tail feathers are on fire, but you really just don't get it.” 

Jim, you've been a commodity bull since 2000.  I know you have invested your client portfolio in this area.  You've done well as a matter of fact.  I can attest to that.  So I'll sign an affidavit if you want me to do that.  But now there are analysts and commentators who question this assumption.  Well, certainly we see a lot of this happen whenever we get pull backs, which is exactly what we saw this week.  And it was not unexpected either.  You must admit we both sat here and expected that to happen.

JIM:  Well, absolutely.  If you take a look at a chart of energy or gold since mid-August, John, it looks like a NASA space launch on a chart. 

But usually in any bull market you have three phases:  In phase one smart money sees an opportunity, they get in early; phase two, it works its way up to institutions, they come in; phase three, the public gets in.  But what has been surprising for me in the cycle that despite stellar earnings that we’ve seen from the sector over the last five years, the sector still remains underowned and unloved.  This has been reflected, John, in PE multiples that you see in the sector.  It doesn't matter where you look in the energy sector, whether it's international oil companies, domestic companies it's pretty much the same.  I mean it's pretty hard or surprising that if you look at the sector as we do and look at valuations that there are still energy companies that are selling at a discount to net asset value in a market that is seeing the price of energy go from 18 to $20 a barrel all of the way up to $95 a barrel as we are in this Friday; or if you look at the natural gas prices, which are at over $8 that used to be at $2.  [2:35] 

JOHN:  You know, when you talk about PE multiples that's another one of those terms we sling around and discounts as well.  Let's do some examples so this vivifies it in people's minds. 

JIM:  I'm just going to take an example of a large oil company, Exxon Mobil.  If you take a look at Exxon Mobil, Exxon Mobil supports a PE of 36 in the last bull market which ended in the first quarter of the year 2000.  Today, despite enormous earnings the PE is around 12.  So it's around one third of where it was the year 2000.  You can look at another large oil company –Chevron – which carried a 27 multiple in 2000, today it's around 10.  It doesn't matter.  You can even look at domestic companies or companies that are more oriented domestically.  You take a look at companies like Anadarko which had a PE in the 40s and 50s in the last bull market.  Today it carries a multiple of around 15.  It's surprising.  Five years worth of earnings gains, five years of rising prices and the multiples have not expanded.  [3:41]

JOHN:  Well, maybe that's why the billionaires are doing what they are doing.  We're talking about Warren Buffett; T. Boone Pickens; Richard Rainwater.  They've all increased their stakes in energy.

JIM:  Sure.  The smart money has been buying and I expect that to continue, by the way, simply for the very fact that I just mentioned, is that a lot of these companies are selling at steep discounts or discounts to net asset value; and the price of energy is still going to go up.  So usually what happened at the start of a bull market, the top performing sector may end up selling at a discount to the market's multiple.  And then as the bull market unfolds, the sector moves its way even to the market multiple or maybe a slight premium.  And then towards the final stage when everybody knows the story, the sector has more analysts covering it, the discount vanishes and is replaced by a huge premium. 

And this is what you saw in the tech sector.  92 and 93 be were buying tech stocks at 13, 14 times earnings.  At the end of the cycle, they were going at triple-digit PE multiples.  So that's indeed, I think, the case you’re seeing right now with resource stocks today especially in energy. 

And that's why I think you're seeing people like Buffet or Carl Icahn because Anadarko is selling at a discount to its net asset value.  So you know, when you're looking at the market today, the PE ratios certainly aren't where they were, let's say, in the last bull market.  But you're looking at the PE multiple on the S&P 500 is at 18.  If you're looking at a PE ratio on the NASDAQ at 37, or a PE ratio of the Dow, I mean the PE ratio on the Dow is pretty high right now and that's because a lot of companies have seen their earnings go down or are actually losing money.  So I think that is going to change as we get into this next phase of the cycle.  [5:36]

JOHN:  And we've seen rising oil prices, gold and silver are up since we began doing this show way back in 2001. 

JIM:  If you look at, and is this why I think it's very important to understand fundamentals.  And especially when you get the pull backs that you've seen today, the fundamentals are getting stronger every year.  Take a look at the economies of China and India, they require more energy to run their economy because that's where most of the manufacturing takes place.  And manufacturing economies are more dependent on energy.  Also as their populations get wealthier they are going too develop an appetite for better diets, better shelter, other consumer goods.  Whether they go out and buy a motor scooter, a car, refrigerators and air conditioners, or plasma screens –all of that is going to require the use of raw materials to make.  [6:30]

JOHN:  We were talking in one of the previous segments about inflation.  How is that going to factor into this? 

JIM:  When people start wising up and taking a look and say
”wait a minute, I don't buy the idea that the core rate of inflation is 2%,”  they are going to need an inflation hedge in the years to come.  Especially when you see today the major central banks of the world from the Fed to the European Central bank to the bank of Japan creating oceans of money.  There is going to be a tsunami of money –and I mean a tsunami – moving through the economy in the financial system.  So there is little possibility first of all that we're going to see deflation.  So when you see central banks taking extra ordinary measures to inflate whenever problems arise in their economy or financial system, deflation is a remote possibility.  [7:14]

JOHN:  So you would expect what?  Inflation to be another driver in this whole factor? 

JIM:  Sure.  Because once again, going back to something we covered in the last segment, not all of that money that's going to move out of the dollar is going to be able to move into Euros or the loonie.  Remember almost all major central banks are inflating.  And what that tells you is when central banks are setting up sovereign funds, that should be your first clue of what's going to happen; and take a look at what they are buying.  Those sovereign funds are going to be buying real assets.  

And the thing you have to think about, especially if you look at the mining sector, gold mining especially, is the sector is so small in comparison to other sectors, or let's say other asset classes, that the money coming in is going to drive prices higher.  I mean you look what the industry was raised on in the last commodity bear market.  Everybody went to just-in-time inventory, which means companies are carrying very low inventories at a time the inventory levels of major commodities are at record lows.  So if you look at the supply side of that equation, it's going to take a longer to bring a mine or a new oil field into production. So supply isn't going to keep up with demand and we have all of the ingredients, at least in my opinion, for another major bull run –the second phase – which is going to be in my opinion very explosive.  [8:42]

JOHN:  What about volatility now?  Look what the happened this week to energy and precious metals.  Again, we expected the pull back after really this surge upwards.

JIM:  You know, a lot of what I think happens this week relates to the Yen carry trade.  The Yen, John, has gone from 124 Yen to the dollar in June to today where it's 110 yen.  And so if you borrowed in yen in the yen carry trade, you need to cover your positions and remain solvent.  So if you're leveraged to the hilt, you need to liquidate and what you liquidate is where you've made profits.  So you take a look at what has done this well in the market, the top performing sectors have been energy metals and technology.  So they were probably the hardest hit sectors.  But the fact remains with inflation on the rise, the dollar's devaluation and central banks inflating globally, there is going to be this big money tsunami out there. 

And you're going to see greater inflation globally – you're already seeing it.  In fact, my son Chris wrote an article about this in last week's Wrap Up and you're going to see also a lot more volatility.  There is a lot more leverage out there.  And as we talked about in the first segment in the Big Picture, in the latter stages of inflation, money velocity increases, volatility increases.  And that's here to stay.  So what you need to think about is make it your ally by buying when others are panicked selling.  I think more importantly right now is to keep yourself focused on the end game and stop worrying about short term fluctuations.  [10:22]

JOHN:  So I guess it goes without saying, James, that you were probably backing up the trucks this week.

JIM:  I've been buying every single day this week for my own account, for client accounts.  I love it actually, when you see these violent selloffs like we saw on Monday and panicked selling.  It always gives you a better opportunity to accumulate more shares in the companies that you maybe you missed out on a chance if there was a company or stock you wanted to own or it got away from you; or for that the matter you're buying bullion, you want to buy more ounces of gold and silver.  Remember the end game when this is all done and said is to own as many shares and ounces as you can afford.  And buying panics are going to give you that opportunity.  [11:09]

JOHN:  And so obviously you're not worried about the pull back because it was something we expected.

JIM:  It was not only something we were anticipating but also I look at these panics from a different perspective.  If you really want to become an investor investors need to become investors.  If you're worried about the price on Monday or Tuesday, you're not investing, you're speculating.  And when you see these panics, you need to start asking questions before you sell.  You need to ask yourself, what has changed this week?  Is the Fed going to stop erasing interest rates?  Is the credit crisis gone away?  Are central banks stopping inflation?  Is inflation going away?  Has everything improved?  These are the things that you need to ask yourself.  In fact, this week they injected more reserves in the banking system.  So are they going to cut rates again?  Most definitely.  Has the credit crisis gone away?  No.  It's going to get worse.  Remember from an investor's perspective, one man's fear is another man's gain.  [12:08]

JOHN:  And Financial Sense Newshour continues here.  We're going to switch to Other Voices right at www.financialsense.com coming up next as I said other voices.  Later on we'll look at your Q-line questions as Financial Sense Newshour and the Big Picture continues.

 Other Voices: Matthew Simmons, Chairman, Simmons & Company Int'l

JIM:  Well, here we are with oil prices over $90 a barrel. The International Energy Agency has reduced its fourth quarter demand.  But are those levels realistic?  Joining me on the program is Matt Simmons, he’s President of Simmons International and author of the best-selling book Twilight in the Desert.

Matt, I want to begin with a headline that we’re going to go with this segment of the program: “Peak Oil – it’s here.”  You have individuals like yourself, geologists like Ken Deffeyes, T. Boone Pickens and Dr. Bakhtiari – let’s talk about why peak oil’s here and let’s talk about the May 2005 figures.

MATT SIMMONS:  Let me add one more very important voice to this issue who gave a stunningly crystal clear address to the Oil and Money Conference in London two weeks ago, Dr. Sadad Al-Husseini.  Now, he’s not a household name unless you know anything about Saudi Arabia, but he was until three years ago the executive vice-president in charge of oil and gas for Saudi Aramco, and he’s got his PhD in geology from Brown University.  And his talk basically laid out area-by-area of the world, and then finally the Middle East, and he showed the $54 billion of projects that are being done in his kingdom he used to be in control of and what their production targets were.  And then he finally added up and showed if everything works we are basically now at an undulating plateau for 10 years before we go into a very steep decline.  Someone afterwards commented about what a pessimistic analysis that Dr. Husseini gave and he took the microphone and he said, “Excuse me, this is best case!”  [14:14]

JIM:  If you take a look at Congress is working on a global warming carbon credit trading – global warming still dominates the news.

MATT:  I was speaking actually in your neighborhood, Caltech, two weeks ago, and one of the things I did out of curiosity is I went on Google and typed in “peak oil” to see how many responses it got.  And it was impressive, it was like 3.1 million; and then I typed in “global warming” and it was 82 or 83 million.  So I suspect that that is not a bad gauge if you were looking at sort of the scales of justice and putting sand on one side and sand on the other and saying, “what are the two big woes?”  Well, there are 80 grains on the global warming worry and basically 3 grains on peak oil.  And what amazes me about that is the very most shrill of the global warming alarmists aren’t arguing that basically it’s going to do anything materially to impact our lives for next sort of 20 to 30 years.  What they’re saying is you’ve got to start now to have any sort of impact on what could be a tipping point.  And what I find so interesting is that if we actually have peaked – which I think the evidence is becoming so overwhelming – I mean that in crude oil production we peaked two-and-a-half years ago – then the implications on our lives in the next one or two years are staggering.  [15:31]

JIM:  And that’s the thing I find astounding myself, in the sense that global warming, if it does or does not occur thirty to forty years down the road, and peak oil here looks like we’ve already passed that and that was two-and-a-half years ago.  And even more amazing to me, Matt, is we almost hit 100 dollars last week.  And on the political campaign I find it’s hardly ever mentioned.  In other words there are other issues – global warming, healthcare.  And this is probably the most dominant issue our generation will have to face and it’s not even on the front of the political burners yet.

MATT:  Yes, I find that absolutely astonishing.  I guess in a funny sense, you  know in the old phrase if you basically put a frog in a vat of cold water and then turn the heat up?

JIM: Sure.

MATT:  That basically by the time it gets to almost boiling he’s happily floating around turning pink.  Whereas if you put a frog in a vat of boiling water he’ll be out faster than you can put the lid on.  I think what’s happened is basically, as we’ve seen oil prices shatter one theoretically unstoppable, impenetrable ceiling after another, we’ve finally gotten numbed to it.  I think people are also fairly intelligently saying, “yes,  I mean it doesn’t seem to be bothering anything.”  And the reason it’s not bothering anything is we haven’t had a shortage yet.  And also, 100 dollars a barrel as I keep pointing out repeatedly is 15 cents a cup.  Anyone who thinks 15 cents a cup is expensive for an irreplaceable, invaluable natural resource they’re out of their minds.  But at the same time any one that thinks we can just grow demand willy-nilly and ignore the unbelievable acceleration of decline curves in so many of our giant fields today are basically whistling past the cemetery. [17:19]

JIM:  I think one thing that has maybe numbed us, and I was thinking of the outcry with $70 oil after Katrina and Rita, and here we are over 90, is after the Gulf War oil shot up; as we went into the second Gulf War, the war was over and they said the war premium was why oil prices were up.  Then we went to 60 and it was the terrorist premium, and then we went to 70 it was a weather premium.  Then there’s a speculator premium, then there’s a dollar premium.  And so it gives one the impression that, “yeah, oil prices are at 90 bucks, but they’re artificial because we have all these premiums built in.”

MATT:  Yup.  There was a wonderful interview that was published in the Financial Times today with Ali Al Naimi – the Petroleum Minister of Saudi Arabia – and he basically said, “we don’t know why oil prices are so high.  They shouldn’t be.  The market is well served.  If it weren’t for these fear mongers scaring the world that we’re going to run out of oil and oil is peaking, we’d never be here.”  So there is the petroleum minister of Saudi Arabia weighing in.  [18:18]

JIM:  And yet we have the optimists, despite the fact that discoveries have peaked, there was a study done on 20 domestically-based oil companies and what they’re finding.  They’re finding new wells but the amount of barrels of reserves that they’re getting with each well are falling and falling.  And so one report after another – whether you’re reading Robert Hirsch’s report, the International Energy Agency’s report, the Council on Foreign Relations, the National Petroleum Council, the GAO – all of these reports are coming out there and saying:  “We’ve got a problem here.”  They get publicity for a day or two, and then they’re forgotten about.

MATT:  And some of them are muted because in the GAO report they did an honest job of trying to gather information of all the people that have an opinion on this.  But they effectively said is you know, quite a few people think oil will peak but the range of when it will ranges from a handful of people saying from now, all the way out to 2041.  And they stop there.  And they sort of leave people thinking: “Well, you can kind of pick your medicine, it’s probably 2041.”

So I think one of the reasons we’re basically not panicked is that we haven’t had anything like the sort of leadership that we’ve seen in global warming.  And that might or might not be overlong, but we have certainly had an unbelievable coalescing around the idea that this is somehow the only sustainable threat to the 21^st Century.  And so far we have basically not been able to get that message across.  And there are quite a few of us that have spent – and you mentioned Dr. Hirsch.  Dr Hirsch has tirelessly talked out about it; I’ve tirelessly talked out about it.  Sadad Al-Husseini is now tirelessly talking out about it;  My friend Herman Franz [phon.] is...And yet this gaggle of economists, and also the major oil companies (who have reason to have credibility) will say, “oh no, oil’s not peaking.”  And yet no one steps back and says, “Well if it isn’t, how come you as a group have spent the last five years in production decline while your E&P spending has basically tripled?”  But not that many people actually know how to add up all the numbers and ask the right questions.  [20:24]

JIM:  As the US economy has gotten itself into a bit of trouble, we’ve got a slowdown in economic growth, I am absolutely amazed when I turn on the cable channels and they’re talking about a reduction in oil prices by 20 to $30 as the US economy slows; and they’re forgetting the total demand picture which has grown every single decade.  I forget what the figures are.  Just in the US and China we’ve increased our consumption by, what is it, 7 million barrels a day just in the last decade.

MATT:  The number I love to basically remind people of is if you went back and scanned daily any of the Oil And Gas Journal, World Oil of 1995, which was 12 years ago, the heavy conventional wisdom was that demand had peaked and we would probably never cross 70 million barrels a day.  And it wasn’t until early in 1976 that the IEA finally adjusted their 95 demand numbers to 70 millions barrels a day.  And the fact we’re talking today being around 88 million barrels a day in the next few months – to grow by 18 million barrels a day in 12 years and have it not planned for is why we’ve ran out of capacity.  And then so many of these forecasts always keep assuming that the demand growth effective was an aberration and it’s slowing down; and the supply disappointment was an aberration and it’s about to speed up.  And you have so many voices that speak with phenomenal authority as if they knew what they were doing and so few people go back and say, “wait a second, I heard the same guy say the same thing when oil was 25.”  [22:00]

JIM:  You know one thing that also gets my attention, we’re talking about new discoveries, we have new technology and with higher prices you get the economic argument, “well, we’ll just go out and find this stuff even though it’s harder to get.”  But if nobody is paying attention to the decline curves – I was reading a report, for example, “Mexico is going to be cutting back its exports to the United States by 150,000 barrels a day over the next four years; and after that it’s going to be half a million barrels a day.

MATT:  They are going to be very, very lucky if that happens.  I think there is just a real grave threat by 2009, Mexico’s production will be so low that they’re going to have to either take their medicine of cutting down internal consumption which is rapidly growing or stopping exports, because they can’t do both.  [22:42]

JIM:  You know, whether you’re taking Mexico or you’re taking other countries, 54 out of the top 64 producers have peaked.  And here’s one I think nobody is paying attention to:  If we’re supposed to get all this excess oil, as demand increases, from OPEC, what about the fact that they’ve been unable to increase their production – that’s number one; and number two, they’re consuming more of what it is they produce?

MATT:  I was just about to add:  What people are really missing is as oil prices improved, most of the OPEC countries’ economies were in shambles for the last 20 years because the oil prices were so low they were all broke.  But now the economies are all starting to boom and so therefore guess what happens?  Their oil demand starts to grow.  Like Indonesia 10 years ago was a major oil exporter, today they are an oil importer, just like the UK.  [23:34]

JIM:  If OPEC, they’ve got a meeting coming up and they’re talking – or at least the rumor in the markets – that they may increase production by another half...

MATT:  Well, Mr. Naimi was very clear this morning and he said in his interview we’re not meeting even to discuss oil production.  We’re having the Heads of State Meeting, it won’t even be on the agenda.  And there is no plan to increase any more oil, we don’t need it.  We’re watching the market carefully.  Well, the fact of the matter is there is no evidence of any quality that they have any ability to increase output.  So it’s an easy thing to say that we don’t need it when you can’t do it. [24:03]

JIM:  Now that peak oil appears to be here – at least from conventional oil – some of the criticisms or some of the emails at least that I get when we talk about this:  “Well, peak oil occurred in conventional oil production in May of 2005, how come I can still get the stuff and we’re producing more today overall when you take total oil?”  How do you answer that?  Is it the alternatives?

MATT:  The answer is that as we edge ahead a million barrels, two million barrels a day, we have had a steady growth in natural gas liquids and refinery processing gains, and then finally the most dangerous supply source of all, stock liquidation, to get us there.  And it’s the stock liquidation that is the most terrifying because we do have an unquantified – maybe a billion-and-a-half barrels of crude oil and finished products around the world that is the lion pack to make our system lubricated.  I mean when you realize it, that in the United States we have probably when you count significant refineries we have maybe about 35 of them in the United States, we have about 170,000 gas stations.  So think of the product we have to have zinging through our system to have that product available in every little town in America.  At some point as we liquidate stocks, we’ve reached the minimum operating level and then shortages pop up.  And once shortages pop up, which they inevitably will, unless we have some rationing system in place consumers will top up their tanks.  And then we snap the system.  It happened in 1973 and it happened in the summer of 1979.  In both cases, it was just the motorists panicking.  [25:34]

JIM:  I’ve been telling people:  Get yourself a fuel efficient car – whether it’s diesel, a Smart Car or something because I think we’re going to see in the next 18 to 24 months, some form of rationing in parts of the United States.  What do you think of that?

MATT:  I think if we have a cold winter in the Northern Hemisphere, which will then push oil demand over 88 million barrels a day, and you look at the crude oil numbers and you say they’re down to about 72.5, and you look at the gap of these sources that are very hard to grow, they take you up to about 85, supplying three million barrels a day out of stock liquidation will create shortages.  You can make odds on that.  What you don’t know is exactly where the shortages will be because they won’t happen across the globe overnight. 

But then all you have to have is a panic.  And what happens is it’s not just the motorist topping up the tank, each service station says fill up all my tanks; all of the ship channel companies, the petrochemical industry say top up our tanks.  So as everyone tops up their tanks you could get an artificial demand boost of three or four million barrels a day which is just basically inventory fuel.  And that is just the equivalent in the energy system as the commercial banking system having a classic run on the bank.  And it was a run on the banks that caused a bank holiday when FDR became president.  We ran out of money at the banks.  [26:48]

JIM:  What’s amazing – all the things that we’ve been talking about here on the program as I’ve had you on over the years what’s going on in Saudi Arabia, the peak in discoveries – the fact that we haven’t replaced what it is we produce in over two decades – all these signs are out there.  But it’s surprising, in one sense, Matt, that we don’t have one radar screen that says, “incoming problem” as let’s say, what might have saved us at Pearl Harbor.  We don’t have that in the energy area.  Yet the pieces are all there.

MATT:  Yup.  I guess the analogy that I hate to use but I think it’s such an apt analogy is to go back and read the tragic history of the 1930s when war clouds were growing so ominous and yet only a handful of people would take them seriously because we had this side kick, the Great War, World War One, had been so utterly awful the living people said, “I don’t want to ever discuss that word “war” ever again.  It won’t happen.”  And maybe there is some element that this is so awful to contemplate that it’s just easier to basically to say,  “It won’t happen.  Bad things don’t happen to good people.”  [27:53]

JIM:  As we started out this interview, peak oil will probably be the most significant event of our lifetime.  And if you think of declining oil production, increasingly more expensive oil production, increasing worldwide demand for oil is going to generate enormous price increases in gasoline, diesel, heating oil, transportation, construction, manufactured goods – all the products that we use oil for their production; and yet people haven’t thought of the implications of this and how this will affect geopolitics, lifestyles, agriculture and economic stability.  I mean it impacts all of them.

MATT:  I think probably one of the reasons that we don’t understand it is that most educated adults – let alone most lay people – when you mention oil, they think of a gas station and literally think of their own personal experience of filling up their tank; and they don’t have a clue that basically how expensive that gasoline was to manufacture; how many different sources of crude from so many unstable places in the world it came from.  So we just basically haven’t ever had much reason to think about energy.  It was so cheap for so long that it was the one thing that we took for granted.  We’re making the same mistake ironically in water because there is some pretty scary stuff I’m starting to read about.  People that are starting to look at their hole card and starting to say, “how are we doing on our world’s potable water.” And those are pretty...But you know, “what do you mean? Water? Water is free.”  But there are some things that were so invaluable that we didn’t charge much for them; without energy we have some awful water problems.  [29:22]

JIM:  You know what I think is so amazing, we live in this modern, technological society with the internet, planes, jet travel – all the wonders of science and healthcare from cat scans – all this technological advancement that we’ve seen over a couple of decades, I think it’s very hard for people to go back to basics and think about things such as the energy that produces all of this, the water that we need to sustain it, or even food, because, you know, I’ve been reading some scary things on the food front in terms of supplies that we have in our granaries.

MATT:  Yeah, and I tell you, if you want a world class problem have shortages of oil which is transportation fuel, and watch how fast our supermarkets empty.  [30:07]

JIM:  When I read Robert Hirsch’s report in 2005 and he was talking about peak oil and he said the best scenario that we could have – this is the most optimistic – is we had pinpointed in twenty years before it had occurred we would take steps to conserve, redo our transportation system, rethink about alternatives.  That would be the optimistic outcome.  And under that scenario we would have plenty of time to prepare for it.  His second best scenario would be 10 years before peak oil, you would still have to have some economic problems but at least we would have got a number of things going that you could help prepare for it.  The worst scenario of all is to not recognize peak oil and all of a sudden through the rear view mirror and wake up one day and say “oh, my goodness, it’s here.”

MATT:  Yup, and I think that’s actually what we let happened.         You know, it was interesting, Bob and I were on a program together in Houston.  It was the Peak Oil Conference ironically, co-sponsored by the city of Houston by the way and the University of Houston – a very serious program.  And at the end of Bob’s talk, his last Powerpoint slide was this is an issue where the deeper you dig the uglier the picture gets.  And I think Bob and I have both gone through a real learning curve of saying this seemed like a serious problem three or four years ago; it is so much more serious today.  And he is not a rabid sort of radical person.  I think he is a very sincere and thoughtful analyst.  I would hope that’s what my epitaph will be.  [31:34]

JIM:  Well, I’m absolutely amazed.  We are a little over, almost a year away from the next election.  Do you think by the time we get to November of next year the headlines, or at least the debate in the presidential election will change and move and gravitate towards this area.

MATT:  I think it’s going to have to.  Unless we have a phony collapse in oil prices – maybe the economy really does slow way down that would be a tragedy because it basically would be one more time that we walked past the cemetery or we turned off the radar system.  I made the mistake of giving a speech – I think it was at the ASPO Conference – in saying that one of the reasons that Pearl Harbor wouldn’t have happened if they had had a radar system.  I got educated immediately by three veterans saying that was the tragedy we had a radar system.  Someone saw the dots coming and thought these couldn’t be real because there are too many planes.  But I think if we haven’t had a phony collapse in prices and shortages this will be the issue that will determine the 2008 presidential election and congressional election, because it’s an issue that you cannot basically be mute on. 

And what I find interesting is that most of the candidates that have uttered a few things they’re just pie-in-the-sky stuff.  I think they are a handful.  I think Bill Richardson has a pretty good grasp of these issues.  I know Mitt Romney does because I’ve briefed him carefully.  I suspect probably Hillary might understand more about this than she would want to speak to because guess what?  Her canny husband, former President Clinton, is now speaking out on peak oil which surprised me.  [33:05]

JIM:  That is a surprise because prior to that it was global warming.  So he’s shifted.

MATT:  Yup.

JIM:  Well, I can tell you if you take a look at the IEA report that says from 2009 to 2012 we’ve got problems, whoever the next president of the United States, whether it’s a he or a she, whoever that may be, I think is going to put a fireman’s hat on because he or she is going to go to one crisis to another, all brought about by peak oil.

MATT:  I’d also say that at some point this group of optimists that were so eloquent need to basically be held accountable and [we] say you really did screw the world.  [33:39]

JIM:  Matt, as we close, besides reading your book what would you tell a listener today that would like to find out more information about peak oil or for, let’s say, on the other side of the fence, what would you tell the skeptic out there?

MATT:  Well, I would say that we happen to post on our website all of the talks that I give and links to a lot of other information.  And that’s one of the reasons why I think we had 10 million hits last year is that there people out there that are listening. 

There’s a growing number of books that are coming out.  On the History Channel tonight – I know you’re taping this for a weekend program I gather – on the History Channel tonight there is a documentary that is going to be first rate on this issue.  There’s a film that’s just opened in the UK called Crude Awakening that I’ve been told is unbelievably chilly.  And these are things that I just know about because I’m in them.  So there is more data out there than one would think.  But there is no one kind of easy to get to Newsweek cover story that’s been done that sort of says...and the issues are complicated and the data is complicated.  And it is something that most people would like to ignore because it is unpleasant.  [34:44]

JIM:  Well, the one thing that we’ve been telling people here on the show is trade in your SUV and get an economical car.  Something that’s going to get a lot of mileage because when you go to get a lot of mileage because when you go to short gas rationing and let’s say they say you only get 20 gallons a week you’re going to want a car that makes the most of those 20 gallons. 

MATT:  You  might start promoting bikes.

JIM:  Bikes.  Or maybe jogging.

MATT:  You’re asking some very good questions and I really admire the work you’ve done because I know the times I’ve chatted with you your questions are excellent and your listening audience ought to be very grateful for the job you’re doing.  [35:17]

JIM: Well, thank you very much.  And as always it’s a pleasure to have you on the program and give out your website because you do post all your speeches which I think are a must reading.

MATT: I think if someone just googled Simmons Company, or Matt Simmons you’d get right to it. 

JIM:  And let me put in a plug for Matt’s book Twilight in the Desert. If you’re skeptical, a lot of great information because everybody relies on Saudi Arabia.  Perhaps you ought to read Matt’s book and take a second look.  Matt, all the best to you and a pleasure to have you on the program.

MATT:  Thank you very much.

 Q-Calls

JOHN:  Here comes time for one of my favorite parts of the program, the Q-line, which means the question line.  The Q-line is open 24 hours a day to record your question for the program.  This doesn't happen in real time, by the way.  I think some people call in and think that if you're listening to the show and you call in suddenly it will appear.  No.  It will be for next week.  It's toll free, the number, from US and Canada 800-794-6480.  That number does work from the rest of the world, but you'll have to pay whatever your international rates are.  We ask that you just give your name and your location.  Just a first name and location generally is fine.  We just like to know where people are calling from. 

We'd like to remind you that the information provided here on the Financial Sense Newshour, especially in response to your questions and comments is for educational and informational purposes only and should not be considered as a solicitation or offer to purchase or sell any securities and our responses to your inquiries are based strictly on the opinions of Jim Puplava.  We are unable, because we don't know a lot about you and your situation to take into account your suitability, your objectives or risk tolerance.  So these are generalized answers and because of that we'll not be liable to any person for any financial losses that result in investing in any companies profiled or mentioned here on the program or any other situation.  Although if you make money, we'll take lots of credit for that. 

JIM:  And we wouldn't mind sharing in your wealth.

JOHN:  There you go.  The first call is from Pat in St. Petersburg Florida.

Hi.  This is Pat from St. Petersburg, Florida.  My question is:  I saw that the Financial Accounting Standards Board has basically balked on the Rule 157 and they are going to allow financial institutions another year to basically come clean, in my opinion, on their Level 3 asset valuations.  This is telling me two things personally, and I'd like to get your take on it.  One, it's telling me that the problem is even worse than any of us think and they are afraid to let the horse out of the barn.  And the second thing that it's telling me is that it's going to take us a lot longer to find out the full extent of this and it will cause the selloff to continue in all asset categories.  Kind of curious what you think about this.  To me it actually makes it sound like the problem is even worse than what the main stream media is portraying it, although I'm hearing very little bit about this extra year that they are giving the financial institutions in the mainstream press.  Thanks.

JIM:  Pat, you hit the nail on the head.  The problem is much, much worse.  I mean just look at the headlines this week.  Look what's happening to the stocks of financial companies including Fannie Mae.  So you're absolutely right.  It's much worse and if they were to make these companies come clean right now, we would be in melt down mode.  So they are going to try to string this out and ease this stuff out into the marketplace and perhaps hope nobody notices.  [38:49]

Hi, Jim and John.  Love your show.  This is PJ from Massachusetts.  Got a comment about Hank Paulson.  He must get a lot of mileage with that business about “a strong dollar is in the best interest in the United States” because now it's “a strong dollar is very, very much in the interest of the United States.”  It's not and it's irrelevant.  Warm weather, mild weather, is in the best interest of the United States.  But that doesn't change the fact that winter is coming.  If I got in front of a microphone every couple of days and said mild weather is in the best interest of the United States or very much in the best interest of the United States, they would haul me off and no one would ever hear from me again.  Thanks. 

JIM:  Yeah.  It's part of maintaining the facade that it's why we allow the dollar to go down in value.  That's always the mantra, the treasury security is the world's reserve currency.  We're behind a strong dollar, but that's just a mantra that they utter that's absolutely meaningless.  [40:00]

 Other Voices: Bill Murphy, Chairman, Gold Anti-Trust Action Committee (GATA)

Hi, Jim and John.  This is Bert in Yuma, Arizona.  I received an email this morning which sends shivers up my spine and strikes fear in the hearts of everybody who holds actual gold and silver bullion.  This is from Bernard von NotHaus, the monetary architect of the Liberty Dollar.  It says: I sincerely regret to inform you that about 8:00 this morning a dozen FBI and secret service agents raided the liberty dollar office in Evansville for approximately six hours.  They took all of the gold, all of the silver, all of the platinum and almost two tons of Ron Paul dollars that were just delivered last Friday.  They also took all of the files, all of the computers and froze all our bank accounts.  We have no money.  We have no products.  We have no record to even know what was ordered or what we owed.  We have nothing but the will to push forward and overcome this massive assault on our liberty and our right to have real money as defined by the US constitution.  We should not be defrauded by the state's government money.  I'm wondering if you could get Mr. von NotHaus on the program or if you could address the illegal action on the part of the US government.  Thank you.

JOHN:  Basically, I'd like to bring on Bill Murphy from GATA since I know Bill, you released a report on this whole thing when it came out and we've had a number of inquiries.  There is a lot of rumors running around etc.  What is your take on the seizure at this stage in the game?

BILL MURPHY:  Well, kind of shocking.  My colleague Chris Powell put it out yesterday and one again today.  It's funny because I just had appetizers and drinks after work with Bernard the other day and he told me that his business was down 75% because of what they'd done before to the Liberty Dollar.  But it was still way ahead of projections of what they thought it would do years ago.  And then couldn't have been happier, more upbeat than what he was doing.  They were going to fight with GATA, just a happy camper and god bless his assets.  And then to have something like the government come in like this.  It's shocking.  I mean it's almost speechless.  And of course this is the kind of thing that GATA has been used to for a long time and it's spreading.  [42:09]

JIM:  You know, there are a lot of people that are bailing out of the dollar – whether it's foreign central banks everybody is looking to alternative because they know what's happening to the value of the dollar.  So you know, when you have somebody that's using the Liberty Dollar as maybe a competition, are they trying to send a message or scare people here?  Because these are very heavy handed tactics.  I think our Founding Fathers would be rolling in their graves.  [42:33]

BILL:  I'm sure Ron Paul is. 

JOHN:  But he's not in his grave yet. 

BILL:  No.  But this is what the kind of thing he's railed against and it's sad because, you know, it’s what GATA has learned what is going on behind the scenes in this country.  It is frightening and this is a visible example of the kind that we've noticed in all areas of our economy, financial market system and so on.  And it's creating something that most Americans could never believe could happen.  I just hope this gets enough publicity.  I know it’ll get a lot of attention in our world, but I know even today GATA is still not allowed to be mentioned in the United States press.  It's a joke, so I wonder how many people will actually hear about this.  That's part of the problem.

JIM:  I'm going to be interviewing Ron Paul on Saturday, so this is something definitely I'm going to be bringing up with Ron Paul, but it's just absolutely amazing because I know, Bill, you've been sort of fighting the good fight and you have to struggle because, as you mentioned, you can't even mention GATA in the press.  And yet if you go over to Canada you've got respected people like Sprott Asset Management is a big GATA follower.  It's absolutely amazing.  [43:41]

BILL:  Well, you know, there is another report that just came out this week that is actually fabulous that if you go to www.GATA.org to see what the Redburn people – Paul Mylchreest – wrote.  It's one of the most comprehensive, well written reports on gold ever done – ever.  And people can get a copy at the GATA website. It pretty much confirms everything that got has been saying and he lays it all out and why.  It’s just absolutely fabulous.  [44:04]

JIM:  I'll tell you.  Keep up the yeoman’s work that you've been doing and appreciate you coming on on short notice.  And John, did you have any other questions that you wanted to ask Bill? 

JOHN:  I guess my observations on the whole thing would be number one, you know, tactics sort of this – I understand, Bill, there was some litigation going on already between that group and the government.

BILL:  It's pretty much – that's what I think shocked Bernard.  Everything was copasetic in the terms of how they were dealing with it.

JOHN:  Of course this was the same methodology that was used against Wayne Hage when Wayne was in litigation with the federal government over his ranching rights in Nevada is that they came in and charged him with a felony and that was designed to derail him.  Now, they've sort of number one deprived them of what assets they might need to pursue litigation; number two, trying to send a clear message because number three, I think more and more people are beginning to look at alternatives to the US dollar.  But then number four, and Jim, you tell me what you think about this, I think this is starting to send a message especially to people outside of the United States, that the United States might not be a safe place to put your money.  [45:07]

JIM:  Yeah.  If you start placing restrictions like this, I mean, what are they going to do if the Dollar Index falls down to sixty or fifty.  Are we that far away from capital controls?  This is actually quite frightening.  And it just tells me that the end game is much, much sooner than what many people are expecting.

BILL:  Well, I'm prejudiced this way, but if it weren't for the Plunge Protection Team I think the Dow would be in a free fall, or not a free fall but be under real, real pressure and confirm the Transportation Index breakdown.  But the Dow is like the barometer of well-being in the market.  Everybody follows.  It’s just like gold is the barometer of well-being so they suppress gold and they prop the Dow up.  But I think that the fan is going to get hit here pretty soon because of the things that you all know about better than I do.  But it’s just in this dilemma that the economy is weaker than they are saying, the inflation is higher, the dollar stinks, and I think things are probably blowing up behind the scenes in structured finance.  And they knocked gold down, but I'm telling you I suspect with oil near its high and the euro near its high and everything falling apart, we're going to see an explosion.  I think they are petrified and that's probably part of the reason they made the move here on Bernard.  [46:13]

JIM:  I also, if you take a look at Thursday FASB Rule 157, which was to go into effect so you can no longer mark these derivatives to model or derivatives to make believe, and they postponed that for another year.  So that tells you that the problem is much, much bigger than they are alluding to or want people to even focus on.

BILL:  That's right.  It's out there.  Anything but the truth for the American public.  [46:38]

JOHN:  So Bill, your website one more time?

BILL:  It's www.GATA.org.  And you've got to look up this report by Paul Mylchreest.  It's very lengthy, it's very comprehensive, maybe one of the best reports ever written about the gold market.  You can find it on our website under Dispatches on page 3.  It came out on Tuesday . It’s up there on Tuesday at 12:10 sent off by my colleague Chris Powell.  This is a very comprehensive report, very lengthy and I would it's a must read for anybody who wants to understand the gold market.  [47:06]

JIM:  Well, Bill, as always, it's a pleasure to have you on the program and thanks for coming on and all of the best.  Once again, you can get that report by going to GATA, that's www.GATA.org; or if you want to keep up on the gold market try Bill’s website: www.lemetropolecafe.com where all the smart writers on the gold market are featured.  Bill, all of the best to you, Sir.

BILL:  Thanks and good luck with your interview with Ron Paul.

JIM:  Thank you.  [47:34]

Q-Calls

Hello, Jim and John.  This is John from Philadelphia.  Quick comment on the Central Fund of Canada as it's come up a few times and my wife and I have a personal interest.  I did a little research so I could find the premium discount on the net asset value and there is a website called ETFconnect.com.  And I was able to put the Central Fund ticker in there and they do have an option where you can see the premium on that asset value all of the way back as far as 1983. There have been periods where it was negative and then also periods where it’s been positive starting in roughly 2001, 2002.  The premiums have been positive and the chart is showing as high as 25%.  Currently it’s about 5 to 6%.  I hope that's helpful

And one other quick question for you related but also unrelated and that is with the gold and silver ETF – GLD and SLD.  My understanding is they were not truly backed by the metals and they were more of a futures contract.  So when push come to shove, the metal is not really there.  Can you comment on that?  Thanks again. 

JIM:  Well, as money goes in and out of the ETF, they go into the gold futures market.  So that's correct:  Money flowing into the gold ETF, they go into the futures market, buy more contracts; money flows out, they sell those contracts.  So if you're thinking of there is a gazillion ounces of gold in the warehouse, I believe that's not the case.  [49:34]

Hi, Jim and John.  This is Mike from New Jersey.  Love your show.  You provide such value to the world investor community.  Keep up the good work.  I just listened to your November 10th broadcast and particularly your discussion with Peter Schiff, and I know there was sort of maybe an argument there between inflating or not inflating.  And I think you guys pretty much both agree I think where you guys might disagree has to do with the fact that inflating by the central banks as you say and increasing the monetary supply will hold off the financial calamity for maybe another 6 to 12 months until we get to real peak resources in 09, 10, 11.  And I've got to think with Peter, I don't think it really matters next if it looks like the problems already began have begun.  And whether we have to wait 12 months for the real problem to begin, I think Peter is saying, “Look, the problems are here now, and America can't afford what it's doing.”  And I'd be interested to hear your comments regarding if you think things are going to hold off for 12 months or you think we're really ready to go into the abyss now.  Thank you very much. 

JIM:  You know, Mike, I think the problems are going to get worse both with the economy and with the dollar.  And as the dollar continues to depreciate in value or lose its value, you're going to see other central banks come to the response.  And one of the reasons why you haven't seen the full effect of what we’re doing is other central banks have been inflating, so if you look at gold, for example, and other currencies, gold has been appreciating against all currencies.  And that's because all central banks are inflating.  So it's a question of who is doing it more than the other.  So it's just my belief that you're going to see major problems in Europe, you're seeing problems in Japan.  And heck, on Friday, there was a story by the Chinese central bank that came out and said if the US goes into recession, “we can really have some problems with our export-led economy.”

 So both Peter and I agree that where the long run outcome is.  All I'm saying is at some point the central banks are going to come in and respond.  And if you listen to the Big Picture when we talked about currency controls they are already trying to do that right now.  They are trying to use regulatory means to limit the capital coming into a country because they know what happens when that large influx of money comes into a country it can destroy that economy.  A lot of it comes in and a lot of it goes out – pretty much like what happened to Asia in 1997.  So it's just a difference of agreement in terms of when it ultimately hurts long term.  And both agreement, it's just whether central banks will respond to it.  It's my belief they will.  [52:18]

Hi Guys.  This is Michelle from Chicago.  I listen to your show every week – great advice – and I love your insights on peak oil.  I did have a bit of an issue with today's broadcast November 10th, your presenter William Kovacs, VP of Environment, Technology and Regulatory Affairs.  It was somewhat disappointing when people will use your show as a political pulpit to tear down ideas put out by other parties.  I don't expect you to broadcast my comments.  I just listen to your show in a nonpartisan way.  And I noticed that in the last couple of weeks there have been a couple of rather partisan presenters.  It's disappointing to think that Americans won't take peak oil seriously and start to cut back on their energy usage and that global warming is seen as something that is only going to happen in 40 years time.  If you're trying to turn the Titanic and miss the iceberg the earlier you start to turn the wheel, the more likely you are to miss the crash.  So I just wanted to leave those comments and I hope your next Other Voice will be somebody who is not a partisan presenter.  For the rest, I appreciate your advice. 

JIM:  Michelle, I appreciate your comments, but, you know, the one thing that we do on this program is we do present people that take a different view than, let's say, the consensus or the prevailing view and I wouldn't consider that partisan.  You know, if you have two people debating an issue, you might have a person that is going to say, “well, there is global warming.”  There is nothing wrong with having somebody else on the show that says “no, I don't believe there is global warming.”

So you're getting both sides and both perspectives.  Not everybody might agree with the consensus.  So we do have opposing views on and I don't consider that partisan.  And we've been criticized, John, when we've had somebody come on and we get attacks from people saying, “I can't believe you had that person that said this.”  So you know, there are two sides to every story.  And I think having opposing sides to each story, I think is a good thing.  [54:24]

JOHN:  By the way, the issue on global warming, it's interesting to note that there is one thing to note whether or not you're having global warming.  The second thing is whether mankind is causing the global warming and that gets lost in the either-or debates.  But the important thing to remember is that there are three legs to a society – the economics, the political, legal leg and world-view religious leg – all three of these legs interact.  No society exists without them.  And so it's almost impossible to extract the economic from the political.  For example, the Kyoto treaty, which is in the process of dying as we watch it, they are trying to get Kyoto Two going in Bali.  The Kyoto treaty was an economic treaty.  Really not a global warming, not a scientific treaty.  And it was intimately tied in with taxes and credits and regulations.  So these two were intimately linked.  You can't separate them out.  People are going to have different opinions.  But like you say, Jim, you’ll hear quite a round of voices here on the show.  That's just the way it flies, so –

JIM:  We've had people on the peak oil subject, we've had environmentalists on the subject, we've had investment bankers on the subject, we've had geologists on the subject.  And we do that to give you a different perspective and we had, gosh, I'm trying to think of the guy – well, he wrote a book and he totally disagrees with peak oil and I got all kinds of comments:  “I can't believe you had that guy you believed from peak oil and you had this guy on the show!”  Well, you know, we want to give you a different opinion and that's how we're going to approach a topic.  [55:48]

Hi, Jim and John.  This is Hugh in Vancouver long time listener, first time caller.  Thanks for the great program.  It's the highlight of my Saturday morning routine and I guess that's either a sad statement about the state of my life or  a tribute to the quality of your broadcast.  I'm not really sure which.  Anyway, my question focuses on comments by John Doody regarding the upcoming TIC Report on Friday and the potential for a market selloff and the potential risk to the junior mining stocks.  Do you believe we're at the stage where these stocks will decouple from the general market and start to become immune to the general market malaise?  Or will this always be a game of two steps forward and one step back? Look forward to your comments.

On another note, we'd sure like to see you and John up here for one of the Cambridge House shows, either in January or June.  I know you're in Vancouver on business occasionally.  It would be great to see you on a panel with the likes of Doug Casey, James Turk and David Morgan.  So by all means come on up.  I'd love to see you in this wonderful city of ours.  I look forward to your comments, I'll be listening with either my usual Saturday morning latte or the not so traditional Maalox cocktail depending on the market reaction to the TIC data.  Thanks for the great show.

JOHN:  Well, Hugh, the first thing I would say is devalue your darn loonie and then we'll come up.  How's that? 

JIM:  I want to get to the Treasury TIC Report and in fact, there was net purchases of roughly about 267.l4 billion versus the net outflows in the previous months.  So it wasn't that bad. 

Do I think that the gold market will eventually decouple?  Yes, I do.  But remember, if you look at any chart of gold or you're looking at an energy chart in any bull market you have these big upward swings in each phase and you have the pull back.  All bull markets go in waves, three waves up, two waves down.  And that's just the way the markets work.  But just remember, the long term trend is an upward trend and the next leg up will be substantial.  But then when we get to a certain point and people are saying “I can't believe it! I've got to get on board,” that's probably the time you're going to have a correction.  [57:48]

Hello.  This is from Matt, Maryland.  I'm a long time listener.  Appreciate your show.  I'm having difficulty reconciling what seems to me to be contradictory views.  The first view is that we have an impending oil crisis where oil and oil products are going to become increasingly scarce and hard to come by with a likely scenario being some type of government rationing program.  That's one view.  And the other view is that under this scenario mining companies are going to somehow perform well.  And to me this seems to be a contradiction because if indeed oil supplies are difficult to come by, I have a hard time imagining a thriving mining industry that doesn't have access to fuel.  So I would be interested in hearing your comments on that.  I do expect the price of bullion to continue increasing, what with the dollar crisis and all, and that to be exacerbated by the oil situation.  But I'm not sure I can shake this concern about the mining company side.  I’d be interested in your opinion on that.  Thank you. 

JIM:  Matt, one thing that we see both in the mining producers and energy producers – even in the energy field itself, the price of oil has gone up 26% last year but mining costs of lifting it out of the ground were up 31%.  So all of this means as the cost keeps going up it's going to put a floor under the price.  And obviously the solution is going to be much, much higher prices.  So if the price of gold can go up and go up substantially, then miners can still make profits and then there is also the leverage factor meaning it has to do with the ounces in the ground.  In other words, if you have the mining company that has reserves of one million ounces in the ground and the value of gold goes up 100 bucks or 200 bucks an ounce, the value of those assets become more valuable, so it's not just the cost of mining.  It's also the value of the assets that they own.  [59:55]

Hi, Jim and John.  This is Rachel in Oakland, California.  Thank you for your great show.  I listen every week.  I really appreciate and your work and that you share this service for your listeners.  I thank you also for your staff.  I particularly appreciate your having Zapata George, Marc Faber and Puru Saxena on.  My question involves an investment I made between 2000 and 2005 in Treasury inflation bonds.  Now, I understood that the CPI understates rather dramatically the true inflation.  However, I thought it would be the best proxy that I could have as an investment in which I didn't have to worry about any loss of principal.  So whereas my fixed income investments are basically making 4% a year, my commodity-related, resource-related investments are doing extremely well.  I'm wondering if you think that CPI will ever get to the point of reflecting in some measure the true inflation so the I bonds would be a good investment.  Thank you.

JIM:  Rachel, I really don't think that will ever happen.  The whole purpose of the CPI reform, as put into place by the Boskin Commission in 94, was to bring down the inflation index.  That’s because what was happening what was happening was Social Security at that time – as everybody knows, there is a cost of living adjustment and when inflation is going up, that means the Social Security budget goes up even more.  In other words, the payouts go up.  So if inflation was reported today, which is probably running close to 10%, just imagine what would happen to everybody's Social Security checks if they were getting 10% increases.  So the whole purpose of that was sort of a back room way of trying to fix the outlays on Social Security and I just don't ever see that happening.  [61:51]

Hi, Jim and John.  This is Dilip from Santa Clara again.  I have a question about some cash reserves that I have in gold and silver bullion as well as precious metal stocks and foreign currencies.  I have one fourth in gold bullion and precious metal stocks and silver; and three-fourths in foreign currencies namely Australian, British, Canadian, euro, the Japanese yen plus Merk Hard Currency fund.  I believe the manager Axel Merk was on one of your roundtables earlier this year.  Anyway, since these are all fiat currencies I would like to know when to move out of these currencies.  I do have some 15 to 20% profit from all of these currencies, so I would like to know when to move out of them and into gold or silver bullion or gold and silver stocks.  So basically what kind of signals would you be looking for to make this transition?  Is it something like an interest rate cut by the ECB or something like that?  So I would like to know what kind of signals you would be looking for to make this transition.  Thank you very much.

JIM:  Dilip, I would use periods like the correction that you saw in precious metals this week to ease out of some of your currencies into gold because it's allowing you, you know, as the currencies went up, as the dollar went down, the metals got hit hard so you're able to get out of your currencies, take some profits and move a little bit more into the metals market.  And then another tip I think you're going to see is when central banks start to respond probably sometime next year to dollar cut and then also further if the Fed cuts in December which I believe they will, you're going to see gold move up rather strongly.  But it will be doing that because the dollar is also going down, so your currency is going to benefit, but your bullion will out perform the currencies.  [63:42]

Hello, this is David from Houston and I know you guys are big on gold and energy, of course, and I have some positions there.  But I wanted to know what you thought about, I know you're big on other types of commodities.  I'm limited in what I can invest in in my 401K and there is an index fund that seems to be based on the Morgan Stanley commodity related index and I was interested in what your take was on the companies that are in that index. How well you think that index will do in the coming months?  Thanks.

JIM:  They should do rather well because they are international commodity based companies.  It's global in nature, so as commodities go up, the companies themselves should do well.  So not a bad pick.  [64:26]

Hello, guys, this is Roger calling from Houston, Texas.  I enjoy your program a lot.  I bought some ultra inverse Pro funds, the symbol SKF for financials, and then the inverse Russell several weeks ago.  And it's made some good money off of that.  I got to looking at that perspective, is there a counter party risk, credit risk.  They’re using, I think, financial, large financial institutions to – with the swap to make that thing work.  And I was wondering, am I assuming a lot of risk here with a counter party credit there with the derivative?  And I just don't know.  That's why I'm calling.  The second question regards James Turk’s GoldMoney:  Do you consider that a very safe place to start buying the metal itself?  Thank you and have a nice day.

JIM:  Roger, I think you're okay with your inverse funds right now.  There could be some counter party risk with some of the banks, but let's put it this way in a fiat system, if the banks got in trouble, the Fed would just liquefy them.  So that's one thing.  And secondly, James Turk's GoldMoney program is an excellent way to accumulate gold and silver.  In fact you can specify which, and you can do it in small amounts, which is what I like.  [1:05:48]

Hey, Jim and John , this is Sean in California.  Jim, my friends and I were very concerned already about the ravages of inflation.  We can already see it every day in things:  Gasoline, groceries, health premiums so on and so forth.  For a person of modest means, middle class income, who really doesn’t have excessive funds to protect them from huge gyrations and their net worth.  I know that you said that you like the idea of holding precious metals – actually physical precious metals than possibly ETFs or mutual funds.  If so, what percentage would you advise if somebody in our position just to help us hopefully survive this next bout of inflation that's going to hit down the horizon. 

Also we've studied these past cycles especially the 1980s, late 70s of gold.  Once it hits the top it falls considerably and we were kind of asking each other, I know you had mentioned that maybe one solid currency for Canada and Mexico and the US.  But would you have any ideas on when you would liquidate your position and go into such a different, safer currency.  That's one thing we're concerned about too because we see some of these things happening maybe faster than we thought, especially if the dollar does stick around.  So we're just concerned about the after-effects where a good plan is to park any funds we might have after the run up.  Anyway, thanks so much for the program, guys. 

JIM:  You know, Sean, if you have a modest budget for investing.

I like owning the bullion.  And I tell you what I would recommend.  I would recommend that you start buying maybe silver rounds so you're not paying a lot of premiums for it so you're just buying one ounce of silver at a spot price.  And, you know, the thing that I like about silver, it's always been called the poor man's gold.  And I think silver is going to have a lot more upside in this bull market run.  You know, you can buy one ounce of silver for $14.50 plus a small little charge.  So if you can put together a small amount of capital, maybe you can only invest 50 or 100 bucks a month.  But, you know, 50 or 100 bucks a month, you're going to be able to buy, five, six, seven ounces of silver.  And especially when it pulls back because I do believe silver is going to be heading to 20 and $25 an ounce.  So this is just one way that you  can keep up with the inflation.  And you know it's very easy to do.  You can start an accumulation program.  Maybe there is a coin dealer in your neck of the woods or you can go with some of the companies we've mentioned on the program.  [1:08:35]

Hello, Jim, this is Chuck from Aurora, Colorado again.  I've been wanting to ask this question for some time.  Bear in mind that I have about 35,000 shares of mining stocks including silver, gold and other metals.  The question was almost asked about a week ago and you really didn't answer it.  You began to talk about your family and how well you all did before the Federal Reserve system really began to influence things and how that has screwed things up. 

In a textbook called the economics of money and banking Lester Chandler of Princeton says the following and I quote:  “Also countries are unlikely to adopt any system in which the size and rate of the growth of international reserves would be dominated by the vagaries of gold mining and nonmonetary demands for gold.” 

I ask you: how can world economic development and individual countries’ economic development be determined by how much gold is found in the ground.  You have tire shortages, you have expensive fuel, you have corporate decision making deciding how much gold to mine.  How can economies grow based on the gold standard?  Thank you very much.  .

JIM:  Chuck, I disagree with the Professor, number one.  And number two, how economies can grow:  The difference with the gold standard is economies grow by production and the natural increase of wealth.  In other words, you invest in a factory, that factory creates jobs, the jobs and the factory create products, those products are sold.  And that's how you build wealth versus paper wealth.  Let's say that a business entrepreneur started a business.  He invests a million dollars in that business, so he buys a factory or has a factory built.  As a result of that, he hires 100 people, so now you have 100 people that have jobs.  They create a product.  That product is sold.  As the product is sold, they make money.  That's how real wealth is created versus let's say out of the flick of an electronic pen, the central bank creates a million dollars of paper out of thin air.  There was no real wealth behind it.  It's absolute nonsense.  You can just take a look at growth rate of the United States when we were on the gold standard or the growth rates of other countries that were on the gold standard.  This is just absolute nonsense to perpetuate the fiat money system.  [1:10:58]

JOHN:  We've got a couple of questions here we'd like to answer.  The problem is, Jim, they ran long, so we're going to remind all the listeners and callers, try to keep your ideas and questions succinct.  Also by the way, since these are pre-recorded some people start into a question and get all flustered and hang up and call back in and start again.  Don't worry about it.  Just restart your question without calling back in.  We'll chop out the bad part before it gets on the air so you don't have to worry about it.  We've had a number of people doing it.  They get about three seconds in and go, “doggone, this isn't working.” Click! 

JIM:  You know, it was a very erudite question, but John, I think it was stated over, like, five phone calls.  You remember that.  That guy and I thought I was listening to a doctoral thesis.  I was very impressed with it, but it just gets so complex and long it was very difficult to answer.

JOHN:  It was hard to follow.  Yeah.  Exactly. 

JIM:  I think I ended up taking notes or something. 

JOHN:  John is in Las Vegas. 

Hi, Jim.  This is John from Las Vegas.  I continue to listen to your show and I really enjoy it.  I’ve got a general question I think that would be worth while for you to answer for everyone.  It has to do with brokerage houses and with the subprime issue continuing to accelerate and a lot of the major brokerage houses being wrapped up in this like Merrill Lynch.  The concern I have as an investor keeping some of my funds in these brokerage houses.  If you have a 1% or less chance that some of these terms go bankrupt, how safe are our assets in these brokerage houses and is there anything we can do to protect ourselves?  Interested in your response and keep up the good work. 

JIM:  You know, John, I'm going to refer that to last week's show.  If you can listen.  I addressed all of the things that you could do from government websites to check out your financial institution.  By the way, Merrill Lynch has the least amount of Tier 3 capital to net equities.  So if you're with Merrill, you're in good shape.  But I'm going to refer to that because I addressed it in the Q-line questions.  It was a rather lengthy responses I think I had.  But what I'm going to tell you, John, go back to last week's Big Picture.  Either, I think it was in the Q-line section that where you answered what steps you can take to protect yourself. [1:13:22]

Hi, Jim and John , this is Ed calling from Toronto.  My question this week is directly related to gold and silver.  All of us Puplava disciples are out there now dollar cost averaging or hoarding gold and silver bullion.  My question is:  How do we know when we've got to the peak price, when it's time to think about exiting?  What are the changes that we should be looking for?  Does it have any different things about look at price ratios between gold and silver, should we be tracking money supply.  What will be the cues to tell us that the bull market and gold and silver is coming to an end,  because historically it's gone up very dramatically, but it also comes down very dramatically. And obviously, we want to exit before the descent.  Thanks very much.  Bye.

JIM:  You know, Ed, we're so far away from that at this point.  I think some of the clues would be if you start hearing politicians talking about ending inflation.  But we're so far away from that we've got so much more currency debasement ahead of us and we have so much more debt that has to be inflated away before we come to the end of that.  But when you see somebody proposing, let's say, a world currency that's going to be backed by gold or a world central bank, and that we're going to try to end the inflation from.  Very much in the way that it was ended in Germany in the 20s when the German government said, “all right, we're going to stop printing paper, we know that's a problem and we're going to back the currency to land.”  The Rentenmark was brought into play and virtually overnight the inflation stopped.  When they stop using the printing presses or hinting at it, that's when you know we're getting close.  But gosh, I think James Turk recently even upped his accumulation range to keep dollar cost averaging as long as gold is under $1500s an ounce.  [1:15:11]

Hi Jim and John.  This is Jason calling from Portland, Maine.  I have a question about the long term effects of peak oil and hyperinflation.  As peak oil begins to wear on and as hyperinflation begins to take hold, things are going to get progressively worse.  Jobs will be lost, food will become more scarce and people will get more desperate.  I was wondering what your long term outlook is and how you're preparing for the long term effects of peak oil and a crashing economy.  You said you liked California for the energy and abundant farm land.  However, it's also the most populous state, so it might not be a safe place to be if social order begins to break down.  Will you ever think of relocating and do you have any guesses about how far away we are about having to think about things like that?  Thank you for your time.  Bye.

JIM:  Jason, we're probably about three years away from that in that 2009...John, what have we be saying?  We've been saying 2009 to 2010 window period?

JOHN:  Up to 12, somewhere in there and 2009, 2012, somewhere in the range.  I mean, I can't tell you an exact date.  I already have an alternate location, so I've got that.  Some of the things that I'm doing is I'm equipping my house with solar tiles.  I've got a special filtered water system because the municipal water system could breakdown. And one of the things I'm working on next is a Rion green house.  So these are just some simple things that you can do.  And by the way, we're going to be talking more about what you can do in preparation for peak oil, but we didn't want to ruin anybody's Holiday season.  [1:16:47]

JIM:  And rumors are, Jim, we'll be taking over Catalina island, declaring a coup and sovereignty over that island.  So that's becoming sometime; right? 

JIM:  Yup.  FSO Land.

JOHN:  FSO Land.  I like that.  I have to remember that. 

Hi, this is Dan in Missouri.  I am tracking the 523 exchange traded funds posted by Fidelity.  The average state of value shows a contraction of the average price of these funds indicating a withdrawal from the market.  The other thing I've noticed is that the sale of short funds seems to be the high gainers for the last 90 days of data.  Financial shorts lead the way with business and small cap funds and real estate in the top 20 listings.  Oil funds were positive in the listings also.   Gold was positive but near the bottom of the top 20 high in the gainers.  Both the markets contraction of prices and short sales of these indicators seem to show bad market times and hard times ahead.  My question is:  How far out is this going to run?  Comments, Jim?

JIM:  If you take a look at some of the funds and just look at the sectors here today, and I'm just looking at the S&P top ten sectors:  energy up 21%, technology up 13%, materials once again getting into base metals up 15%, Telecom up 8%, consumer staples up 11%.  So there are a lot of areas that have done very well.  And the two best performers have been by far energy and metals.  And I expect as we get close to the end of the year as more inflation comes into the system stock prices are going to be higher than where they are today.  [1:18:24]

Hello, Jim and John.  This is Richard calling from Buenos Aires, Argentina.  Jim, last week you spoke about the pros and cons of a hypothetical junior that might choose to be taken over by a big boy or might go into production on its own.  But I wonder if you could elaborate on one or the other possible choices available. For example, what about a joint venture or the sale of the blue sky property that this company may be developing or any other possible choices that a company like this might have. 

JIM:  You know, Richard, when I was talking about that what happens is in the mining industry today, I think there is a greater realization with the big companies that they only used to look at the five million ounce deposit and I think that's become unrealistic.  You've even had companies like Newmont say that “hey, you know what, we can look at smaller stuff and develop it.”  Usually, I don't like joint ventures that much.  I don't think you get the full upside on things.  I prefer the blue sky.  What would be more likely is if a company has a proven deposit but still plenty of, let's say, blue sky left on some other properties they own, a more likely event would be somebody comes in, a major or intermediate company, they buy the developed property with the idea of taking it into production.  And then what's left over, the blue sky stuff is left and that becomes another company.  You saw that happen with San Francisco Gold; a lot of their blue sky stuff ended up becoming Chesapeake Gold.  So that's a more likely scenario.  [1:19:57]

Hi, Jim and John.  This is Joe from New Jersey, really love your show, learning a lot from it.  I have heard you mention on a previous show that you recommended increasing cash holdings and eliminating exposure to the S&P 500.  I now have a large amount of my IRA in a brokerage money market account wondering what to do with it.  I also heard and have read a lot of pundits advising to get out of US dollar denominated investments.  I also heard you say previously on the show you recommend getting into commodities, energy, international stock funds and so forth.  Aren’t they denominated in US dollars and wouldn’t they still be exposed to the prospect of a rapidly declining dollar?  I don't have much money for retirement.  I'm really looking to protect it and hopefully grow it.  I greatly appreciate your advice and how you think it's best for me to proceed.  Thank you.

JIM:  Well, Joe, I think one area they have to be in to protect yourself as a hedge is you've got to be into the natural resource sector, whether it's energy or it's precious metals.  And you might want to do that through a mutual fund if you're not familiar with the companies that are involved in the sector.  I think something else – whether it's a domestic company or an overseas company, companies that have a good portion of their business overseas are doing well – whether it's American multinational or foreign run multinational – because that's where most of the growth is.  If you take a look at economic growth in the United States or in Western countries and compare that to the economic growth of other countries, it's obvious that the other parts of the world was doing much better and growing at a much faster rate.  So you're going to want to put some money in resources.  And you're going to want to have a percentage in metals, energy, commodity-type stocks.  And I think, international markets – whether you do that through a fund or a multinational company.  [1:18:48]

Hi Jim and John.  It's Rick from Saskatchewan, Canada.  I sold my oil trust when Alberta raised the royalty tax, fearing a Halloween massacre.  It looks like I got tricked.  Nothing happened.  Oh, well.  I'm calling because Shell oil field was on CNBC saying lots of oil out there and price should go to $50s.  And Cramer’s old buddy was also on saying that,  “that’s it, no hundred dollar oil!”  Could you comment and get Matt’s opinion on what influence these guys have?  Thanks.

JIM:  You know, Rick, the oil companies have been saying there is lots of this stuff out there, but they've been telling us that for the last six years.  All of the while, their production has been declining throughout the year.  Now, Shell is working on a shale oil project and they have an in situ technology that they have where they can heat the shale in the ground to basically do nature's work.  And they have some leases that have been granted and they are working the political process now to begin production of shale oil.  That's their goal to do that by the middle of the next decade.  Now, if you look at the total shale oil out there in terms of overall reserves, yeah, there is plenty of oil out there, but will they be able to take and produce shale oil to the same extent and ease which you can call pull the light sweet crude out of the ground?  I don't think so.  But just bear in mind that the oil company has been telling us there's plenty of oil.  There might be in terms of total reserve.  The more important question is, if you listen to Matt Simmons, conventional oil production peaked in May of 2005 and it's been declining since then.  [1:23:28]

Hello, Jim and John.  [Spanish phrase] This is Don from Crystal Lake, second time caller.  Jim, I’ve got four questions for you.  I'll try to be brief.  Question number one, I would love to see the exchange between Ron Paul and Ben Bernanke in Ben Bernanke's testimony.  How do I get a full length visual of that?  Does C-Span have a website I can go to and download that programming?  Jim, you're on Nightline.  Wow.  That's fantastic.  I can't imagine you were on there giving financial advice talking about peak oil.  If you were, that would be great.  I would love to see that too.  But you never really told your listeners why you were on Nightline.  It would be interesting to find out if you're talking about the California fires or peak oil.  Let us know.  And Let us know how we can see that. 

Third question, I want to listen to Jim Rogers and invest my money in the Chinese Renminbi how would I go about doing that and how would you buy the Renminbi for your clients?  I don't know of any ETFs or any way to do that as a US citizen.  Can I just call my brokerage firm up and say invest my money, buy me Renminbi currency?  Would they be able to do that? 

Last question is how do foreign central banks peg their currencies to the dollar?  Do they sell their currencies in the open market and buy US dollars thereby kind of creating an equilibrium between their currencies and US dollars?  In other words moving dollars removing dollars from the system, and flooding the system with their own currency.  Is that is that how peg?  I'm just curious as to how the peg to the dollar actually works.  Thanks very much. 

JIM:  Don, you might want to try You Tube or the Ron Paul website for the Bernanke debate.  You might have to Google to find that or go to YouTube.

JOHN:  Yeah.  YouTube has it, but C-Span, I can't find it on their site right now.

JIM:  Yeah.  So it's on YouTube.  In terms of Nightline, I was on talking about the dollar.  I didn't know I was going to be on Nightline until the day I was on Nightline, so I couldn't give anybody a heads up.  And if Jim Rogers talks about investing with China, one of the things Jim talks about, one of the best ways to profit from Chinese economic growth is buy the things that the Chinese need.  What are the Chinese using?  They are using raw materials.  Invest in things that the Chinese buy.  And the Chinese buy raw materials.  So energy and raw materials would be a way to capitalize on that.  And finally your last question:  How do foreign central banks peg their currencies to the dollar?  You answered the question yourself.  If their currency starts to strengthen, then what they do is start to sell their currency and buy the dollar so they keep the peg in place.  [1:26:01]

JOHN:  And what he said in Spanish was “until some kind of day in the corner market.”  I'm not sure why he said that, but I'll have to go back and listen to it.

JIM:  Maybe.  I don't know.  Is that a secret code or something? 

JOHN:  Anyway.  Let's go to the next question.  Here we go.

Hello, Mr. Jim Puplava.  My name is Kirk.  My question to you is concerning a recent article that was featured on the website Iamfacingforeclosure.com November 12th 2007 title.  “Deutsche bank foreclosures tossed out of Ohio federal court.” Quote – “they owe nothing” – unquote.  The New York times three days later has now run a similar article by Gretchen Morgenson entitled “Foreclosures Hit A Snag For Lenders.”  Both articles are reporting on the same story.  Even conservative Drudge is sensing something of a scoop.  They describe a situation where Deutsche, an international conglomerate corporation bank, is unable legally foreclose and securitize mortgages which it holds here in the US due to some legal something or other.  This would seem to suggest, at least in the good old US of A owners of trillions of dollars of debt have in effect no absolute collateral – no collateral to repossess their investments if there is no repayment on those debts.  The implications of this suggestion maybe cataclysmic.  For what might a debt security product be worth if the debtor refuses to make timely and you have no collateral nor recourse to set non-repayment.  As a layman, I'm curious to hear your viewpoint and value any interpretation of this bizarre source.

Kirk, this is a very, very dangerous precedent that's going on in Ohio and believe me it goes beyond that and gets worse.  There is a bill before Congress – I'm not sure if it's the house or the Senate – that would give you in the case of foreclosures or bankruptcies where the judge could actually say to a lender, “gosh, I know you loaned the guy 150,000, you have a crude interest of 20,000 added on to negative amortization, so the total debt is 170 and the interest rate you're charging is 6 ½.  We're going to reduce that debt to 120 at a 4% interest rate so the payment that this person can make is reasonable.  You want to hear something scary, you just heard it.  [1:28:29] 

JOHN:  Because ultimately what it means is contract law becomes fluids at that point, doesn't it?

JIM:  Yeah.  Contracts are meaningless.

JOHN:  Yeah.

JIM:  This by the way, John, is something that we refer to when we talked about the return in headline inflation in the first hour is not only does society become uncivil in its discourse, but also the rule of law gets thrown out the window and you're seeing part of that unfold right now.

JOHN:  Yeah.  It's when you start with the living breathing Constitution and work on downward from there that everything starts to live and breathe.  All right.  Here we go.

Hello, Jim and John.  This is Ike calling.  Last Monday we all noted gold stocks and mutual funds significantly decreasing in value.  At the same time the dollar and the Dollar Index had a significant gain against almost all its major foreign exchange counterparts.  Many people then said that the only reason gold value has been pushed high in recent years is the weakening of the US dollar, and that the moment the dollar demonstrates any signs of recovery gold value were precipitously drop.  Do you share this opinion?  Is that explanation the whole truth?  And how does it apply to the financial market?  As always, your comments are greatly appreciated.  Thanks for all of the information and God bless. 

JIM:  You know, Ike, I think a lot of what you saw this week is the unwinding of the carry trade.  If you're borrowing, for example, in Japanese yen and you're investing at a lower interest rate and then you're investing in something that pays a higher interest rate, it's fine as long as the Yen doesn't go anywhere.  But when you see the Japanese Yen appreciate from a high of roughly 124 Japanese yen in May and it drops all of the way down to 109 Japanese yen, you had a lot of companies –  hedge funds and leveraged players – that were unwinding those carry trades, which means that was precipitating the rise in the Japanese yen.  And if you're investing in other things that have done well and you've got profits and you have to get liquid, you're going to liquidate the areas that you have strong profits.  And if you look at the three areas that were hardest hit on Monday, energy stocks, precious metal stocks and technology stocks, that's what I think was happening.  It was simply leveraged players unwinding their hedge funds bets.  [1:30:48]

My name is Lee in Virginia.  Great show, guys.  Love it.  I'm not shorting the dollar or America so much as I am Larry Kudlow.  But I am reading actually the 14th of November Wednesday Money Investing section of the Wall Street Journal where it says “Steven Chen, Morgan Stanley’s chief currency economist says the US currency has gotten grossly undervalued and it's forecasting model takes into account interest rates, productivity growth, budget deficits and a host of factors. It’s telling him the buck is 25% lower than it should be against the euro and 21 percent undervalued against the pound, although it might have to fall further against the yen.”  Any how, I wanted to get your reaction to that.  I thought it was an interesting quote.  Thanks much, guys.  Great show.

JIM:  Absolute nonsense!  [1:31:30]

Hi, Jim and John.  Long time listener.  Love the show.  I have two questions for you.  First I wonder if you could get Lutz Kleveman on the show again.  You did one of the best interviews that I've ever heard on the show with him.  Wondering what was he doing these days.  And second, I remember a terrific interview you did with Bill Bonner never seven years ago, but I just can't seem to find it on the expert archives.  It would be nice to see that show again.  Thanks again.  Keep up the great work.

JIM:  I have to follow Lutz and see if he's done anything different from his book The Great Game.  Probably not going to have him back unless he's written something new along the same subject or something that would be of interest to our readers.  John, I can't recall.  Did we interview Bill Bonner?  I don't think we did, did we? 

JOHN:  A while back we did, but not recently. 

JIM:  I'm trying to think.  You might have to go become to the archives 2003, 2004 to find it because we were doing a lot of stuff like that back then.

JOHN:  And by the way, Jim, I should point out that I would say 98% of all the questions make it on the air.  The only questions that really don't are ones which either aren't appropriate or people who use body parts and other descriptors of our family backgrounds, lineage, deficiencies, therein.  Those people’s numbers are generally permanently black-balled from the program.  But we are not averse to people asking hostile questions but we expect you to do it as an adult, not as we say body parts and things like that. 

Anyway, we are done with this program, looking forward to the gold program next week which will include Ron Paul.  He has agreed to do an interview with us on that one.  And tell us what else will be coming up?

JIM:  Well, this is going to be a great gold show.  I think part of the reason, John, is usually I go up to San Francisco for the gold show but we just ran into too much technology problems on the convention floor; the noise – it was very difficult.  So what we've got, we've got some great, great interviews.  There is going to be a round table discussion with myself, Dr. Lee Ann Baker, Keith Barron and Rob McEwen will be joining us for a round table discussion on the gold markets.  We'll have an interview with Ron Paul.  We have another surprise interview that we're just trying to see if we can get this worked in the beginning of next week.  It's regarding what's going on in the gold market on a major report that was just issued.  We've got probably one of the best gold shows that we've done in probably five years, so I'm really, really looking forward to this.  It's been a lot of work putting it together, but I think with all of you listening we hope you would agree is probably the best gold show that we've done.  So hopefully, this is exciting and it's just been great putting this together.  Just a lot of great information we're going to be bringing your way.  So that's going to be next weekend the first FSN gold show.  We'll do it each year rather than what we've formerly called the San Francisco gold show.  So a lot of great stuff coming up next week. 

After that, December 1st, Charles Mizrahi, but he's got a new book out called Getting Started In Value Investing.

All of that and much more in the weeks ahead.  In the meantime on behalf of John Loeffler and myself, we'd like to thank you for joining us here on the Financial Sense Newshour.  Until you and a talk again, we hope you have a pleasant weekend.

© 2007 James J. Puplava, Financial Sense ® Newshour

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