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Death of the Euro?
- 07/03/2012
- with Mike Shedlock
One of the most popular economic and financial bloggers today, Mike "Mish" Shedlock says the worst has yet to come out of Europe.
Mike Shedlock of Mish's Global Economic Trend Analysis gives a lesson on different schools of economic thought. Mish talks about the one event that could save the EU from breaking up, whether or not it's time to invest in Japan, and the ruling on Obamacare.
Aaron Brabham: Welcome to Stansberry Radio. I'm Aaron Brabham. Porter is out this week, so I have the very talented Dan Ferris filling in. As most of our listeners know, Dan writes the 12 Percent Letter and Extreme Value. Dan, welcome to the show.
Dan Ferris: Thanks, Aaron. It's very good to be here.
Aaron Brabham: Today, we're interviewing Mike "Mish" Shedlock. Mish is a registered investment advisor for Sitka Pacific Capital Management. He runs one of the most popular financial and economic sites on the Web: Mish's Global Economic Trend Analysis. We've been receiving a lot of feedback from our listeners. Some of the feedback comes in via our feedback@stansberryradio.com address while others leave us messages on our newly dedicated toll-free Stansberry Radio hotline. Call us 24/7. 855-SA-RADIO, that's 855-727-2346. Don't forget to visit us online at stansberryradio.com where you can subscribe to our mailing list, send us direct messages, download our podcast and transcripts.
All right, Dan. Before we get to Mish, I want to talk about something that this is something that Porter and I talk a lot on this show, but it's very hard for investors to get excited about, and it's world-dominating dividend growers. It's your specialty. Why should everybody have this as a substantial part of their portfolio?
Dan Ferris: Well, I think everybody should have it as a substantial part, because I think they're going to lose their rear ends if they don't. Let's face it, Aaron. Most people just stink at actively managing their own money in the stock market, and I think they always will. It's human nature. It's human nature to get all excited and buy Internet stocks in the late-'90s or buy almost anything in 2007, and it is also human nature to sell everything in late-2008 or early-2009.
So, you want something that will inspire confidence in someone, that maybe they will have a much harder time selling. They won't want to sell it. So, you turn to companies like Coca-Cola and Walmart and all the world-dominating dividend growers that we talk about: Procter & Gamble, MacDonald's, et cetera, et cetera. And these companies, they're the safest companies on earth, because they have incredibly good balance sheets. Many of them are loaded with huge amounts of cash. They are the most consistently profitable businesses in the world.
And I often use Walmart as the example here, because it's a thin margin but it's a consistent. The net margin just hovers right around 3 percent relentlessly, year after year. Now after a while, a consistently thick profit margin, somebody – Economics 101 teaches us that you should go after that. A competitor should go after that and winnow it down, even if it's that small, but they don't. These world-dominating dividend growers, they maintain these consistent margins.
I think last quarter Microsoft's margin was – their gross margin was something like 77 or 78 percent, and it's like that every year, every quarter. It's just the way the business is, because they offer something that everyone wants. They have a huge competitive advantage. And so, the cash keeps coming in year after year, quarter after quarter, and they literally make more money than they know what to do with. This is another important point. By the way, Aaron, I'm just going to go off on this, so ________.
Aaron Brabham: Yeah, yeah, please do, because I can't –
Dan Ferris: You're going to have to interrupt.
Aaron Brabham: We can't say this enough to our listeners, because they just think it's so boring.
Dan Ferris: I know.
Aaron Brabham: They're not going to get this moon shot and this 10,000 percent. But guess what? You're not going to lose your money, and it's going to steadily grow, and you're going to have dividends increase. So please go on.
Dan Ferris: Right, right. So, boring is good, though. You want boring ______ or not.
Aaron Brabham: Boring is great.
Dan Ferris: Yeah. Boring is just like, well, all we're doing here is making a ton of money year after year. It's really not very exciting. So, boring – and boring I think is going to become – it's already become a lot more interesting given the events of the last, say, four-five years. And in fact, it seems that boring becomes more interesting all the time. If you watch the investment company, Institute Numbers, they put out a weekly number that shows you money flowing into and out of mutual funds, equity funds and bond funds. And it's really consistent the past three-four years that most weeks billions flow out of equities and more billions flow into bond funds. So, people are just – they're scared and they really want boring, boring stuff.
And I think you can do a lot better than bonds, though. Look, people look at these world-dominating dividend growers, and they see maybe a 2.5 or 3 percent or 3.5 percent dividend, and they say, "Well, that stinks. How am I going to get anywhere making 3.5 percent?" But you're not making 3.5 percent. You're getting 5, 10, 15, 20, 25 percent dividend raises year after year for decades on end.
This year, I believe, is Coke's 50th year of just raising the dividend every single year. And I think Procter & Gamble is up to something like 53 or 54 years in a row. And all the companies, MacDonald's and Target and all of these things, they just raise their dividend relentlessly year after year. So, you are beating inflation.
You're getting – well, on average, the ones that we recommended in the 12 Percent Letter over the past year, you got an average 10.5 percent dividend increase. So, where did you make 10.5 percent anywhere over the past year? That's what you have to ask yourself. And you can do it pretty safely and pretty consistently with these stocks, because they are, as we've said, so boring. All they do is gush money.
Aaron Brabham: And Dan, sometimes it's a stock, so it will run into a little bit of trouble. It may see some earnings, some quarters, that don't meet expectations.
Dan Ferris: Right.
Aaron Brabham: But let's take, for example – this is why these stocks are so good in my opinion. This is why Porter writes about them and you do as well. You write about them in a digest and, of course, your newsletters. Let's take that Walmart scandal that happened a couple of months ago.
Dan Ferris: Right.
Aaron Brabham: The stock drop – what did it drop the day of and the next day? What was the total percentage, you think?
Dan Ferris: I seem to recall it was around 8 or 9 percent. It wasn't huge, but no.
Aaron Brabham: Wasn't huge, but it was pretty substantial for a stock that doesn't do that.
Dan Ferris: Yeah.
Aaron Brabham: You were salivating. You immediately wrote about, "Look, guys, this is not going to sink the company. It's going to be just a blip. Even if they have to pay their max fines, this is nothing to worry about." And it – what? It took a week, two weeks, for it to return back to its share price. But during that team, you were beating the drum, "Guys, get in this, get in this, get in this." And I know a lot of our listeners and subscribers did. But that's a great example of how these companies can withstand any negativity.
Dan Ferris: Right. And if you just sit back and say, let's see, is this still a wonderful business? Yeah, it kind of still is. Is this still the place where – that's just embedded in the consumer's mind as the place you go to save money? Well, yeah, it still is. Are they still going to operate in Mexico? That's the scandal we're talking about: the Mexican bribery scandal. Yeah, they are.
So, what's the worst thing that's going to happen? Well, I kind of spitball – we really don't know this. But we kind of spitball, what if they have to pay something like $8 billion? $8 billion, that'll be a massively enormous fine. $8 billion, that'd be about half of their net profit, not quite half of their net profit for a year. So, wow, that's huge, right? I mean that would just devastate them, right?
Well, not really, because as soon as they paid it, from that moment forward, the fine would cease to have any effect whatsoever on the business, right? It would become a backward-looking event, and their earnings power would be not even a tiny little bit impaired at all. So, you have to look at it that way. I the earnings power truly impaired at Walmart? No. It's still going to be Walmart. It's still going to grow.
They're still going to have – I don't even know how many stores they're up to now. They could be up to 8,000 worldwide by now. I know it was 7,000 not too long ago. So, you have to just sit back and take a look at these things and say, "What's the real impact going to be? And is this still a wonderful cash-gushing business?" And the answer is yes, and now the thing is pushing $70.00. It's like multi-multi-year highs on Walmart now. So, you really wish you bought it when it was down low. I think it got to the mid-$50s ____.
Aaron Brabham: Yeah, absolutely. And for me, these world-dominating dividend growers are absolutely perfect for 401(k)s, kind of the "set it and forget it" thing, versus the mutual funds that eat you up in fees. They get disproportionately balanced where the fund manager has to sell stakes in the best-performing stocks because it throws off the percentage of allocation. But world-dominating dividend growers are great "set it and forget it businesses". And I – look, I like put 20 percent aside for speculation, but not 100 percent, not 50 percent. Put a small portion to speculation and then, of course, don't go more than 4 percent in each potion that you choose. But for that other 80 percent, it's hard to go against world-dominating dividend growers.
Dan Ferris: I'm glad you mentioned speculation, Aaron, I really am, because I do it myself. I think people would be surprised at how much money I have. I have a lot more than 20 percent in stuff that you would call speculative, but the rest of it is really solid businesses with huge competitive advantages that just gush lots of free cash flow every single year. But I don't know. We could talk speculation a little bit.
In fact, I'm planning to write something in my next issue of Extreme Value, which is due out later this week, about speculation, because it's important. You want to take a small amount of money and make a big amount of money out of it. You've got to find something that's highly cyclical and that you believe you could figure out the value of it and buy it when nobody wants it. And right now, some of these small mining stocks have been really crushed pretty hard, so.
Aaron Brabham: I was about to say, the junior resources, they're starting to hit the 2008 levels.
Dan Ferris: Yeah. Those are really scary stock. People behave badly with regular stocks. They behave atrociously with the mining stocks.
Aaron Brabham: They are death traps. There's no doubt. They all have the best story in the world. They're all convinced that they're going to pull massive amounts of gold and silver out of the ground, and yet they never develop into anything. Plus, they dilute your shares the entire time you're in the stock because they're constantly raising capital. Not the best businesses. But if you can get a John Doody or somebody like that, these guys seem to know how to get it done. Sprott and – which we've had on the show, and of course, Rick Rule. I mean these guys have a nose for that type of business.
Dan Ferris: Yeah. Of course, John focuses on producers.
Aaron Brabham: Yeah, he's definitely into the producers.
Dan Ferris: Yeah.
Aaron Brabham: He's not into the speculation of the miners which is good. All right, Dan. Well, let's welcome our guest, Mike "Mish" Shedlock to the show. All right, Mike. So recently on your blog, you wrote about the 12 reasons why the U.S. is in recession or soon will be. What are a few of the major reasons you believe this?
Mike Shedlock: Well, I'm just looking at the slowdown globally. And Europe is without a doubt in recession and has been for some time. China is slowing. The idea that the United States is going to decouple, which is what I've said, is just completely silly. In fact, I repeated this yesterday. I didn't even realize that the manufacturing PMI was due out today, and lo and behold the U.S. manufacturing is in contraction. It just came out today, so I'm just looking at that news report right now.
But we've got a whole slew of tax increases that are coming down the line. The alternative minimum tax is going to kick in big time, and other taxes. Actually, healthcare is a tax. The Supreme Court has in fact passed that legislation on the basis that it is a tax. So, a whole number of things like that. And so far the United States has been bucking the trend.
And amusingly, back in 2007, 2006, 2008, the consensus opinion appeared to be that it was going to be China that was going to decouple from the rest of the world. Now everyone thinks that the United States is going to decouple, and I said, "I don't think so." And I specifically talked about U.S. manufacturing PMI, and here we are. It's in contraction right now.
Aaron Brabham: All right. And then, just on that topic since you brought it up about the ObamaCare, what should Romney and the Republicans do about this?
Mike Shedlock: Well, I think they're going to have to change it. I mean I'm just talking pragmatically speaking. I didn't like the bill. Actually, essentially, I think Romney authored the bill, but he put in a very similar program when he was in – as governor of Massachusetts. Now all of a sudden he's saying, "Well, I'm not for it," at the federal level, at the national level.
Well, I'm just looking at this and saying, pragmatically speaking, they're going to have to do something about it. I don't think they're going to be able to scrap it wholesale, because to do that would require, first off, Romney to win, and I'm not convinced he's going to win, but second off, take over the U.S. Senate. And I strongly don't – believe that the Republicans will not win control of the Senate. So, that means we're left with trying to do the best we can with it, and that means taking it apart piecemeal even though there is a lot there to dismantle.
Aaron Brabham: Yes, there is. Dan, you have some questions?
Dan Ferris: Yeah. On the subject of the – of ObamaCare, I wonder, Mike, if you can – if you even care to speculate about impacts. Let's just say this thing – that they have a really hard time dismantling, they have a really hard time. We say Romney gets voted in, and every wonderful thing happens that sets us up to fix this thing politically, and they just can't get it done. What happens to the medical profession? What happens to the healthcare business in the United States?
Mike Shedlock: I think we just have to wait and see on that. I don't know. The one thing we do know is we're spending too much money. The U.S. has the most costly healthcare system for what we spend and for what we get out of it in the entire world. So, something has to change. And to change it, there's got to be compromise. Yet I don't see the Republicans acting as if they want to compromise on anything. The Democrats don't seem like they want to compromise on anything either.
The – going back to the tax package that passed that kicked this thing off until, essentially, after the election, I think Republicans did that with – believing that Obama was going to be a one-term President. Polls suggest that that's not likely going to be the case. So now we've got not just healthcare but the alternative minimum tax, we've got all these other things, that are going to have to be on the plate.
And it's really too bad that we didn't have someone more pragmatic like Senator Coburn who, for example, was willing to accept some small tax hikes in favor of getting more reductions in Medicare, getting favor of reductions in Social Security, increasing the age. It's going to take a pragmatic approach, but I see right now everyone digging in their heels. So which side ultimately comes out on top and what political, or more likely, economic event happens to cause this? I don't know, and that's the troubling aspect, because otherwise we're marching down the path, here, of Japan, who all of a sudden our debt-to-GDP are is going to be miles high. Theirs is 225 percent and growing. And so, I guess that shows you that there's still tan left to be kicked here in the United States, but it won't be a good thing if we kick it.
Dan Ferris: I'm glad you brought up Japan, Mike. I'm an value investor all day long. I want stuff that's safe and cheap. I want a really good business with a great balance sheet, et cetera, et cetera. Every now and then, Japan shows up as dirt cheap with stocks that trade at discounts to just the net current assets, right?
Mike Shedlock: Uh-huh.
Dan Ferris: The cash and maybe receivables, right?
Mike Shedlock: Yes.
Dan Ferris: But I never buy them. Japan just – I really – I have a block about Japan, because I just don't believe that you can get anywhere buying businesses where they never developed the idea of strategy the way we did in other economies, especially the U.S. And if you pile their huge economic headwinds on top of that, you get this sort of stalled machine that isn't going anywhere. Am I totally wrong about this? Should I be buying Japan when it gets dirt cheap or no?
Mike Shedlock: Well, there's a couple of issues here. The – first off, their manifesting is sinking. It is also export manufacturing is back in contraction. Prices are falling in Japan still. They are in the midst of deflation. I don't think that these conditions can last forever. They've lasted for 20 years. In terms of value, Japan pops up on Sitka Pacific's value list as well.
Dan Ferris: Uh-huh.
Mike Shedlock: Indeed, we have a number of – a small percentage, it's not huge, invested in Japan right now. However, we think that there is a currency issue here that's going to hit Japan. So, if you see these companies and you like some individual companies or even if you just want to make a generic play as we did, say, with a Japanese fund of some kind, JOF or whatever, then you have to say, "What's going to happen to the currency?" But looking at the balance sheet aspect, these corporations after 20 years have no debt on the books. They've trading undervalue, many of them. So, there's a lot of things to like.
But yet, I see what you see. I keep expecting the Japanese stock market to rise, but it's not because of the strength of the yen. But what happens if a currency crisis hits Japan? If the yen starts sinking, I think the Japanese stock market's going to soar. That's how I'm looking at it. And so then what do you do as a value investor to play this? We have to have a currency hedge on. So, you – maybe you start buying some Japanese equities and you hedge with the yen. Of course, hedging is imprecise, as you know. And right now the yen is very strong, Japanese equities aren't going anywhere, so you're not – you're losing a little bit, actually, on both sides of the trade.
I suspect when conditions change that you're actually going to be making on both sides of those trades. I just can't tell you when that is. I think that's the $64 million question. Or are we up into the trillions and billion dollar questions here now? But the – but anyway, that's our approach. We like Japan. Fundamentally, I like Japan, but it's nothing you can bounce into whole hog here. And if you do bounce into it, you need to be thinking about what, does the end do? And if you support my thesis here that Japan's got a debt problem that's going to require pruning or weakening of the yen or that that's just going to happen because some of their export businesses sinks, then that's the way to enter the Japanese trade.
Dan Ferris: Well, you bring up the issue of currencies which is really an interesting one right now, isn't it?
Mike Shedlock: Yes.
Dan Ferris: We seem to have that problem in every major place we turn to, right? United States, we could have this problem, although at the moment we don't appear to have it. We could definitely have it in Europe, couldn't we?
Mike Shedlock: Well, we do have it in Europe.
Dan Ferris: Yeah.
Mike Shedlock: There's a currency crisis ongoing right now. The – I think Europe's going to break up, and I don't see any way around it. I think the only thing that can possibly hold it together is – well, first off, Germany would have to be willing to put forth a referendum, put it to the voters, and the voters would have to decide, "Okay, we're willing to do this." But Germany is going to want a lot in return for that. Here, France does not want to give up sovereignty. Some of these other countries, Spain does not want to give up sovereignty.
Certainly, the U.K. would never enter this. Of course, they're not in the currency union at all. But in the U.K., they're even talking about leaving the EU altogether. And I believe, actually, if they put it to a vote in the U.K., the – a public vote, not the politicians deciding – that the U.K. would actually leave, just say, "We're tired of all these rules, of all these regulations." And that's the problem with ceding control to Brussels.
Germany thinks that it will be able to control what happens. The problem is, practically speaking, you get a bunch of politicians, they put this pact together, and these countries gets votes based on percentages. Well, Germany has the largest percentage, but it doesn't have a majority by itself. If France, Spain and Italy all get together and decide, "Okay, we're going to do something in this union," that's what Germany voters have to put up with.
And Germany is going to pay a price. They're either going to pay a price by giving lots more money to Spain, to Italy, to Greece, to Ireland, or Germany's going to pay a price, Italy, Spain, Greece end up exiting the Euro. So, trying to figure out where the Euro is going to go right now is very, very problematic. And if you notice, it's trading in this band here right around 1.25 to the U.S. dollar. Well, if Spain, Italy, Greece, Ireland exit the Eurozone and Germany, Austria, the Netherlands are essentially what's left, well, the Euro can actually soar in value. On the other hand, if Germany goes back to the mark and Italy goes back to the lira, and we're left with France plus the Club Med states and Greece holding the Euro, well, the Euro's going to collapse. It's going to collapse to beneath parody.
So, those are the two battling forces here, and I'm not seeing anyone phrase it in these terms, but that's what's going on here with the Euro. You can't just look at this and say, hmm. So that's why the Euro strengthens. Every time Germany gives in a little bit and we're going to keep Germany in, if it looks like countries are going to start leaving and breaking apart, well, then how does it break apart? That's going to determine the fate of the Euro.
Dan Ferris: So, Mike, what is sort of longer term or at all, what is Germany's incentive not to leave?
Mike Shedlock: That's a good question. I – the political leaders, none of them want – they're trying to hold this thing together. Merkel has built her entire career on pushing this Euro forward. So, whether it's right, wrong or indifferent, that's a political stand that she's taken. The Hollande and Sarkozy in France, the president and former president, have taken the same exact stance. A lot of the politicians elsewhere, I mean some of them in Finland are looking at this a little bit closer now. The Netherlands might be doing something. The people in Greece, my God, they are the staunchest supporters of the Eurozone. But it really makes no sense.
And actually, I don't know if you saw that Pew survey, Greece rated themselves the hardest-working people in the entire EMU. But – quite amazing actually. But the weakest is Italy here. Italy – public support in Italy for the Euro is right near the 50 percent mark and declining. And one thing that's not on anyone's radar, I've not seen anyone – any other blogs really talk about this, is the rise of Beppe Grillo. And I'm not sure if it's Grillo or Grillo, G-R-I-L-L-O. But this is a comedian who has decided to launch a political party. It's called the Five Star Movement.
And in September of 2011, the Five Star Movement was polling at 3 percent. It's polling at 21-22 percent right now which doesn't sound like a lot maybe to someone in the United States, but that makes it the second largest party, political party, in Italy. And it's only a point out of the league, point or two out of the league. And one of the tenets of the Five Star Movement or actually one of the tenets of Beppe is he wants to leave the Eurozone and default on all Italian debt.
So to me, this is the number 1 story. The next election's in Italy. Monti's going to be gone in 2013. If there's early elections, he'll be gone before that. But actually, the longer they delay until these elections, the worst things are going to be in terms of from the perspective of the Eurocrats, because I expect the Five Star Movement to keep gathering strength. And if by 2013, especially if the Italian economy keeps sinking, and I think all of Europe's going to sink, we're going to see some people voted in that actually want to get out of the Eurozone.
Now in terms of to answer your question, the what is in for Germany, because I've still not explained that, I think it's fear. The – a lot of people are hearing all of these Armageddon stories from – actually, from everywhere, from all the Eurocrats, from Brussels, even magazines like Spiegel. And the Germany finance manager, Wolfgang, right now is saying, "My God, what a disaster? What a calamity it would be if the Eurozone busts apart?"
Well, it will be a calamity if it busts apart piecemeal. But if they sit back and do the right thing, which is let Germany leave, let the Club Med states have the Euro, and actually put some plans in to do this thing smoother, it doesn't necessarily have to be this calamity. It's going to be painful either way because Germany has a price to pay. Germany is either going to funnel more money to these other countries, or these other countries are going to leave or Germany leaves and the Deutsche Mark soars in value and Germany's exports collapse.
So that's what we're talking about here. Germany's going to pay a price. The question is, what price does it pay? And right now, the political leaders have convinced a slightly majority of Germans that it would be better to pay the price of keep funneling money to the Club Med states rather than to exit. I don't know how long that sentiment will last given what we've seen in Italy.
Aaron Brabham: That's an excellent little piece about the EU. That's something that I haven't thought of, and that's interesting. Now let me as you this. Porter's written a lot about the U.S. dollar losing its world reserve currency status potentially because of all the debt and the printing presses being fired up. But with the mess in Europe, do you see any other currency as being stronger that the world would, essentially, agree upon to exit the dollar?
Mike Shedlock: There is none. And I wish Porter was here, unfortunately, because I would be pleased to engage in a little debate. Maybe we can do that again.
Aaron Brabham: Definitely.
Mike Shedlock: But I think everyone's looking at this backwards. I think the U.S. would love to lose the world's reserve currency status. Look at what it's done to us. The – recall a few years back when everyone was saying, "Well, the U.S. needs to – in order for the U.S. to recover, it needs a weak dollar." And certainly, Bernanke, the Treasury, everyone was – actually, they're begging China still today to strengthen the value of the yuan. So, if they're begging China to strengthen the value of the yuan, they can hardly be concerned about keeping the world's reserve currency strategy, can they?
But look at what makes the U.S. the world's reserve currency strategy. We've got the largest markets in the world. The U.S. is everyone's largest trading partner. Actually, China maybe – Europe is China's largest trading partner in aggregate, but you can't really look at it in aggregate for the reasons we've just discussed, okay? So otherwise, the U.S. is everyone's largest trading partner. We've got the largest bond markets in the world. We've got the largest treasury markets in the world.
We've got – the United States, of all the major countries, is the easiest place in which to start a business. So, we have business formation in the United States. We've got free capital. We've got deep liquid bond markets. We don't have the political disunion problems of Europe. So, add all of these things together, and the U.S. is actually stuck with the world's reserve currency, and that makes it very difficult for the United States to actually do something about its export problems.
Now the solution to the U.S. trade deficit problem is actually to go back to a gold standard where if – then we would see – we would not see all of this flight of labor, flight of manufacturing, the exodus of manufacturing out of the United States to all of these other places. Why? Because they would have to pay us in gold and they don't have any. So, that is – or we would have to pay them, and it would take care of the problem.
So, that's how I'm looking at it. So, everyone's saying, "My God, the U.S. is going to lose reserve currency status." I say, first off, "To who?" And then second off, "We're trying to do it. We're hoping it happens," and it's not going to.
Aaron Brabham: Mike, let me ask you about another post that you wrote recently and then we're going to let you get out of here. You recently wrote about petroleum usage being back to levels seen in 1998 and gasoline back to 2002 levels.
Mike Shedlock: Yes.
Aaron Brabham: With the usage dropping and the WTI production increasing, particularly with shale, we're just hitting this boom in oil shale kind of like natural gas, I know Dan Ferris has written about it extensively, he calls it the New Industrial Renaissance, where do you see oil prices heading over the next 12 months?
Mike Shedlock: Well, that's a tough one. I've been calling for them to decline, but there's two competing forces here. The competing forces are the slowing global economy, and the other side of that is peak oil. So – but I think China is slowing much more rapidly than people think. And even if China – say, even if China grows at 2 or 3 percent, eventually, that is going to catch up to peak oil. But peak oil is one of the reasons that I've commented that China can't possibly keep growing at the 7 and 8 percent that it's doing.
But right now, given the slowdown in the global economy with the – with U.S. manufacturing taking a hit just today, I would say that oil prices are headed lower. That's going to present some interesting opportunities down the road, should that happen, because of peak oil. So, energy is one of the sectors that people need to be looking at down the road. Some of these stocks are beat up already –
Dan Ferris: ________ supply is come – oil supply is coming out of the woodwork these days.
Mike Shedlock: It is. It is, but so how fast does peak oil catch with it? I mean, I think it's not supply's coming out of the woodwork. It just seems that way, because actually it's demand collapsing rather than supply coming out of the woodwork, but –
Dan Ferris: Really? We haven't just had a major technological revolution in the oil and gas industry that has just cranked supply of oil and gas up well beyond demand?
Mike Shedlock: I don't know. I think with – I mean are we seeing it yet? I'm – I haven't followed the oil shale story enough to comment very closely. But let me just say, I'm going to believe that when I see it. Natural gas, certainly we have seen a big ramp in production of natural gas which kind of reminds me, and I was poking at the hyperinflationists just the other day, because I remember natural gas was supposedly going to $40.00 or $30.00 or something and oil was supposed to go to $200.00. Well, here we are, oil's around $80.00, and natural gas is pretty close to rock-bottom all-time prices here.
So, I don't know. There's certainly a lot of theoretical supply here, but what does it take to extract anything from oil shale? How much energy do we have to put into it? How much environmental problem do we have to put into it? How much cleanup is there?
Dan Ferris: Well, we're answering my question right now, because they're hauling it out of the ground at an incredible rate. And they're finding – they just found this Cline shale which any decent honest to goodness oil man will look at and tell you is bigger than the largest three shales: Bauch and Eagle Ford and Monterey, combined, because it's got so many target zones and it's so enormous.
Mike Shedlock: This is oil or is this –
Dan Ferris: Yeah, Cline shale in the Permian Basin, massive oil find, massive.
Aaron Brabham: And then these are using the technologies of horizontal drilling and fracking which were revolutionized for the natural gas business. This is something that we actually are studying heavily. There was even a – we talked about on the last show, because we'll always debate peak oil people, because it's not a geological problem, it's a capital problem. So, when the price gets so high, that's when these independent companies will go out and they'll put the resources together and they'll drill. Well, they've got it down to a great price point now where they can pull it out. And a Harvard study as well as Goldman Sachs believes by 2020 we'll be producing in the United States alone from the shale 10.1 to 11.2 million barrels a day, and our highest production was 9.6 back in the '70s. So, we completely –
Mike Shedlock: What are we producing right now?
Aaron Brabham: That's a good question. I think it's in the 6s right now, 6.9-ish.
Mike Shedlock: So, we're going to go from 6 to 9. How – what's the U.S. total consumption?
Aaron Brabham: That I don't know what the total consumption is. It's about ___________.
Mike Shedlock: These are the questions that I'd need to look at and also the size and actual ongoing of these things. But certainly, if what you say is true, a 50 percent increase in the supply, if we go from 6 to 9, that's what we're talking about here, that ought to bring down the price of crude. So, here we are. We can add supply to my deflationary global recession theory here that says that these prices are going to come down. So, if those numbers are accurate, then that is more pressure on prices.
So, I'm adding this whole picture up and I'm looking at demographics in the Eurozone, demographics in the United States, certainly demographics in Japan, and we are in a – the midst of a deflationary bust here. And it's only politicians and central banks that are actually working to counter that force. And I don't think they can do it, because central banks can't force businesses to borrow, and they can't force people to spend money.
Aaron Brabham: One more thing, Mish, and then we'll let you run. Really appreciate the time. Definitely have you on in the future when Porter's here. Let's talk about for a second about your personal website, michaelshedlock.com. I always like when people have passions outside of finance, because I think it's good to balance your life out. And you're a big photographer. Your photography has graced something like 80 covers or something like that, so –
Mike Shedlock: I've had 80 magazine covers.
Aaron Brabham: 80 magazines. So, congratulations there. That's a big deal. And I'm sure we have some listeners out there that have a passion for photography, so just talk a couple minutes about that, and then we'll let you go, and we appreciate it.
Mike Shedlock: I'll talk about a couple of things if I can here. I'm do a – first off, my economic website is globaleconomicanalysis.blogspot.com. Now that's a mouthful, but there's an easy way to find me. Just do a Google search for Mish, M-I-S-H. It'll take you straight to my blog, and I talk about all the things we're discussing here today. Four times a day typically, I do four times – four posts a day approximately and typically two on weekends. So seven days a week I'm usually writing except for major holidays like Thanksgiving and Christmas.
But my photography site is as what you said, and I've had 80 magazine covers, some for Country Magazine, the Chicago Tribune Sunday supplement. My wife is on the cover of a book, Paddling Southern Wisconsin. I say wife. My wife is deceased due to ALS, Lou Gehrig's disease, May 16th of this year. I'm doing a fund raiser for the Les Turner ALS Foundation and – through my blog. Do a Google search for Mish and lilacs if you want to find this post, Mish and lilacs, those two words, do an Internet search for, and I've written about this.
I've raised money through my blog from 44 countries around the world. $220,000.00 so far to the Les Turner ALS Foundation, and I expect to get up to about the $400,000.00 mark by the time this – my campaign ends in September. So, those are the things that I'm working on. I'm very proud to have raised that much money for the benefit of Les Turner ALS Foundation. ALS is Lou Gehrig's disease if I didn't say that, and that's what I went through for the last three years, watching someone's health slowly deteriorate from not being able to talk, from not being able to walk to not being able to even sit up, and finally in the last couple of weeks lost all ability to move her hands, move her legs, talk, do anything. It's a steady progression, a horrific disease, and we're trying to battle it.
So please, do a search on my blog for Mish and lilacs. That'll take you to a post where I talk about the fundraiser that I'm doing. And the title of that post was "Stop and Smell the Lilacs". It's a philosophic point of view about maintaining a positive attitude and trying to do what we can, and so I'm trying to do this for the benefit of the Les Turner ALS Foundation.
Aaron Brabham: That's great. Sorry for your loss, Mike. I know it's a very difficult disease to deal with. And I will certainly post that up on our stansberryradio.com podcast where we have your podcast and your bio up. So, hopefully, we can drive some traffic and get some donations for you.
Mike Shedlock: Thank you very much. Pleasure to be on the show.
Aaron Brabham: You got it. Well, thank you very much and have a great day, and we'll talk to you soon.
Mike Shedlock: Okay, thanks. Bye-bye.
Aaron Brabham: Thanks. All right, Dan, he definitely needs to do a little research on the peak oil. I think I'm going to send him the Harvard study that we recently got our hands on. Have you seen that, by the way? I think Porter copied you on it.
Dan Ferris: I don't think he did.
Aaron Brabham: I'll send it to you as well. It's basically everything that we believe and what we've been working on this package, Porter and myself, for the past 11 months. And then lo and behold, we got ahold of this Harvard report, and you're going to be blown away by it, because they break down every shale formation. Actually, they break down like 170 different oil fields in the world. They threw all their resources at it, and they're even more bullish on production than the Goldman Sachs 2017 10 million barrels a day is. So, I'll send that over to you.
Dan Ferris: Yeah, it's no – I mean, I'm sure it'll be a very impressive piece of work, but it's no surprise to me, man.
Aaron Brabham: This is not a fad.
Dan Ferris: I've been singing this song for years.
Aaron Brabham: Yeah, you – yes, you have. You have written some excellent pieces in your New Industrial Renaissance, and I mean, man, you're really bringing it to the forefront, and you're finding some great companies out there too.
Dan Ferris: Yeah, well, it's a wealth-creation process what's happening here. It's revolutionary. This is the way it works. And the folks who support the peak oil idea, they're guilty of something that is often a problem for investors and people in general. They're saying, "Well, this is different. Oil is different. Oil is different than other economic good. So, we're going to run out of it one day." But they fail to remember that every human body that consumes is born with a mind that thinks, and that mind that thinks obviously trumps the body because we've been able to create all this excess wealth in the world. Not everybody has an equal share of it, but that's a different problem.
Aaron Brabham: Yeah, very good. All right, we have a couple segments to go. National Scumbag Registry. This week, we're adding another name to the national registry. Please keep sending us your nominees. If you have personal experience with a politician or another trusted figure that has let you down, let us know. You can e-mail us feedback at stansberryradio.com or you can leave a message on our toll-free hotline, 855-727-2346.
Today, we're nominating Florida State Republican David Rivera. He's under investigation by the IRS and the FBI for a $510,000.00 payment from a dog track to a company managed by Rivera's mother and godmother. He has also used $65,000.00 in campaign funds to pay for personal expenses like dry-cleaning, pet costs, a dentist's bill, and travel expenses for his girlfriend.
Man, every week we nominate these people, and every week I'm not shocked by their corruption. This guy, no surprise, is representing the Miami area. So, there's no corruption down in Miami, is there, Dan? Yeah, exactly. That's my thoughts exactly. I lived down there for a year to open up a mortgage branch for the company I was working for at the time, and I quickly realized that unless you are involved in illegal activities like kickbacks or hiring appraisers that were willing to have fraudulent appraisals, you don't do business in Miami in a mortgage business. So, that gave me everything I needed to know. They have different laws down there than we do in the rest of the United States. It's very bizarre.
Dan Ferris: I don't – I've not been to Miami in many, many years. ______.
Aaron Brabham: It's fun place to visit, not the best place to do business in my opinion. Scumbag update, last week, the Republican-led House of Representatives voted to hold Attorney General Eric Holder in contempt for failing to disclose internal Justice Department documents in response for a subpoena for Operator Fast and Furious. Obama has invoked his executive privilege to block the subpoena. The contempt citations will likely have little impact since Holder will be long gone once it makes its way through court.
To me, this whole situation is a black eye for both parties, but especially Obama. I don't know why he continues to protect this guy. I think this will keep going to the forefront of the news. And if I was Obama in an election year, man, I don't know if I'd be backing this guy anymore.
Dan Ferris: Yeah. Who would've thought it would be a really bad thing to give a bunch of weapons to a bunch of murderers?
Aaron Brabham: Yeah. Nobody would've thought that.
Dan Ferris: Gosh.
Aaron Brabham: I mean, come on, that way you –
Dan Ferris: You know something, Aaron? That's almost as smart as thinking that people who have been trying to incinerate and annihilate each other for centuries would come together on the issue of currency.
Aaron Brabham: Yeah, it is about a ridiculous as that.
Dan Ferris: Euro.
Aaron Brabham: That's not going to happen. All right, Dan. I want to get your reaction. I have a couple of pieces in the news for our "You Just Can't Make This Stuff Up" segment. In Europe, workers are given four to six weeks guaranteed vacation leave. Well, recently, I think it was two weeks ago, Europe's highest court ruled that workers who happen to get sick on vacation are now legally entitled to take another vacation. Quote, "The purpose of entitlement to paid annual leave is to enable the worker to rest and enjoy a period of relaxation and leisure." The ruling applies to all 27 countries that are part of the EU. What do you think about that, Dan?
Dan Ferris: The right to leisure. Boy.
Aaron Brabham: The right – yeah, that is your right. And if you were sick, you didn't get to enjoy the leisure time, so therefore you get more vacation. How many people are going to abuse this?
Dan Ferris: Well, that makes sense. I mean, come on, you can't enjoy your vacation if you're sick, right?
Aaron Brabham: Well, that is a good point, because laying around doing nothing is hard work.
Dan Ferris: Oh, yeah, but I have to pay for it. Oh gosh.
Aaron Brabham: Man, these guys are going to get flooded with – people just earned themselves an extra two weeks' vacation on average across the board, no doubt about it.
Dan Ferris: Sure.
Aaron Brabham: All right, Dan, I'd like to get your thoughts on this. Vaccines manufacturer Merck, knowingly falsified its mumps vaccine test data. They spiked blood samples with animal antibodies, sold a vaccine that actually promoted mumps and measles outbreaks, and ripped off government and consumers who bought the vaccine thinking it was 95 percent effective. They used the falsified trial results to swindle the U.S. government out of hundreds of millions of dollars for a vaccine that does not provide adequate immunization.
Dan Ferris: I'm really just shocked that this business that is highly, highly regulated where you just can't get anything done without a half a billion dollars would have this type of thing going on. Isn't it just shocking that when you exclude all the small players and say, "You know something, you're not going to get a trial through, you're not going to get to your third trial without half a billion dollars," or whatever it costs these days it's going to attract this kind of a scandal. Gosh, isn't it shocking, Aaron? I mean, it's just shocking.
Aaron Brabham: I mean, this is a –
Dan Ferris: You mean the rules didn't save us?
Aaron Brabham: Right, exactly. I mean this is corruption on a level that's enormous because you have so many hands in the petri dish for this one. I mean it's not like one guy trying to work some kind of Ponzi scheme or a team of three or four people. This is straight up just totally lying left and right to continue on this path to try to get some riches. All right, after Fanny and Freddie went bust in 2008, the FHA, the Federal Housing Authority, stepped up to help homebuyers, specifically with the first-time homebuyers credit. In 2009, the FHA doled out more than $12 billion to the first-time homebuyers program.
There was – I mean there were a couple of guidelines, Dan, but there was only one catch. The catch was the borrower had to be current on their federal taxes to become eligible. That makes sense, right? You're going to get some money from the government, you should have to be up to date. So anyways, the Government Accountability Office, which I think is an oxymoron in and of itself for the name, released a report that shows the FHA overlooked that qualification rule.
The GAO found that the FHA ensured over $1.44 billion in mortgages for over 6,300 borrowers with $77 million in federal tax debt who benefited from the 2008 American Recovery and Reinvestment Act. Of those borrowers, over 3,800 individuals claimed and received over $27 million in Recovery Act first-time homebuyer credits. By the way, those borrowers are more than three times more likely to default. Imagine that.
Dan Ferris: Of course they are, because whether or not you pay taxes is kind of a terrible way to figure out who you ought to lend money to.
Aaron Brabham: I totally agree with that statement 100 percent, because I dealt in mortgages for five and a half years, and I always thought some of these guidelines are the most ridiculous guidelines out there. but imagine a government program for housing gone bad, that's shocking.
Dan Ferris: Yeah. I could imagine if you're doing actuarial type underwriting over an enormous group of people, you might have one box where you check where you say, "Did the guy pay his taxes?" But you don't move it to the top of the form and exclude everything else. That's kind of silly.
Aaron Brabham: I mean I used to write these loans, and these FHA guidelines are definitely the most lenient, and they would have things in there like, "Allow up to $2,000.00 of collections," "Allow this type of defaulted debt," things like that. And I was like, "Man, these guidelines don't make for a strong borrower, especially when they're only putting 3 percent of their own money down and that can come as a gift from programs like the first-time homebuyers program. So, you have, what, two months of reserves in your bank account, so you need $2,000.00, which by the way, was nearly impossible for these people to do, and you expect them to pay on a house? Good luck with that program.
Dan Ferris: Yeah. We have a big program in this country. We say, "Everybody should have a house," and then we try to make it happen and it's a freaking disaster. And then we say, "Everybody should have a college education," then we try to make it happen and it's a freaking disaster. We don't learn too well, do we?
Aaron Brabham: No, we do not. All right, mailbag time. Dennis, a very old Christian wrote us, "You're not going to convince a Christian that he is stupid for believing in his faith, and you're just going to piss off three-quarters of your customers. Don't be so arrogant with yourself. Pride is man's biggest downfall in life. Once you believe your success is only your doing and no one else, you're in trouble. You do make me think twice about continuing my subscription, but I like Doc's Retirement Millionaire newsletter."
Well, we appreciate that. By the way, as Porter and myself have stated, we are out of the religion – religious guest business, because it is not worth it by any means. Man, you guys definitely brought the heat when it came to the religion podcast and our somewhat atheist views.
Another one from Max, he had this to say about peak oil. "In my view, peak oil theory is absolutely true, because the hydrocarbon content of the planet earth is finite but completely useless because you can't tell if the peak is occurring in 2012 or in 2312. On another subject, how about John Doody, the gold guy, as a guest on this show?" We'll definitely get John Doody on the show. Dan, John's a character, isn't he?
Dan Ferris: Yeah, John is – he is a character and a really smart guy who has a really interesting viewpoint about investing in gold stocks. I mean, I don't know anybody else like him. Do you? I've never heard of anybody who says, "Look, I only buy a producing gold company."
Aaron Brabham: Never.
Dan Ferris: Yeah.
Aaron Brabham: And not only that. That guy is a former economics professor, so he's a sharp guy, and he understands how to break down formulas and numbers. And this guy, essentially – I don't know – it was in mid-40s or something like that decided to leave his teaching career and pursue this fulltime. Now the guy's worth over $11 million or something like that, and he's living the life. And he has – and he subscribe – he has so much value for subscribers, it's off the charts. I think the guy's like inception of his newsletters return like 900-plus percent or something absolutely ridiculous like that.
Dan Ferris: Yeah. Well, of course, gold had a great run and he –
Aaron Brabham: It did.
Dan Ferris: He participated in that brilliantly and continues to pursue a really excellent strategy. I would recommended anybody who's into gold stocks and who thinks that they're going to pick the 25 cent winner that's going to go to $25.00 and makes them 100 times of money probably should take a look at John Doody and get a dose of reality, because John does something. He does this – he focuses on these companies because – for a very important reason. You can't really value something that doesn't produce, that doesn't make something, right?
It's really, really, really hard to value a discovery, a gold discovery. Somebody drills a whole in the ground or 2 or 3 or 10 or 20 or however many holes it takes them to say they have a discovery, and you don't know what it's worth. You don't know. The chances are like 1 in 3,000, I heard one time, 1 in 5,000 of it ever being a mine.
So John says, "Well, over here, there is a mine and it produces this much and gold is this much, costs this much to produce, and you get this much when you sell it," so you can actually value it. That's one of the reasons why I like the world-dominating dividend growers, because you can value something that produces a lot of excess cash flow. Most of the companies in the market, most of the publically traded companies, you can't value them, because they don't produce a consistent stream of excess cash flow. It's really important. And John takes that to the gold stocks and does a brilliant job with it.
Aaron Brabham: Imagine that. So, let's think about the Internet dotcom boom. Webvan had $600 million thrown at him to deliver groceries to your house –
Dan Ferris: Right.
Aaron Brabham: – that they never delivered groceries. So, wow, producing something before investing in them, pretty important.
Dan Ferris: Yeah.
Aaron Brabham: That is why Dan's world-dominating dividend growers and his newsletters are key I believe for every investor. But you also have a lot of institutional investors that subscribe to your newsletter: hedge funds, big Wall Street firms, isn't that correct, big investment advisors?
Dan Ferris: Yes, there's a list of them. I think they're mostly brokers and analysts within those big institutions who found the letter on their own. So, it's more like the individuals within the institution, not the institution.
Aaron Brabham: Well, they're the smart registered reps and the brokers, because if I were them, I'd be doing the exact same thing. Well, the guest on our next show will be Cullen Roche. Cullen is the editor-in-chief of Pragmatic Capitalism. Thanks for listening to us today on Stansberry Radio. Special thank you to Mike Shedlock for joining us on the show. Also, Dan Ferris, you've been an excellent sit-in for Porter. I appreciate your opinions and your commentary.
Don't forget to visit us online at stansberryradio.com where you can subscribe to our mailing list and listen to our podcast. Follow us on Twitter @StansberryRadio, like us on facebook.com/stansberryradio, and subscribe to our YouTube channel Stansberry Media. Don't forget, if you ever need to talk, have a rant or a question, call 855-SA-RADIO. And if you enjoyed the show and learned something new today, please tell your friends about us. Thanks a lot, guys. We'll see you next week.
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This Episode's Guest
Mike Shedlock
Mike Shedlock (Mish) is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Shedlock blogs at Mish's Global Economic Trend Analysis, which typically has commentary every day of the week. He is also a contributing "professor" on Minyanville, a community site focused on economic and financial education.
He does weekly podcasts every Thursday on HoweStreet and a brief seven minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy, he spends a great deal of time on photography and in the garden. He has more than 80 magazine and book cover credits. Some of his Wisconsin and gardening images can be seen at www.MichaelShedlock.com.
Shedlock blogs at Mish's Global Economic Trend Analysis, which typically has commentary every day of the week. He is also a contributing "professor" on Minyanville, a community site focused on economic and financial education.
He does weekly podcasts every Thursday on HoweStreet and a brief seven minute segment on Saturday on CKNW AM 980 in Vancouver.
When not writing about stocks or the economy, he spends a great deal of time on photography and in the garden. He has more than 80 magazine and book cover credits. Some of his Wisconsin and gardening images can be seen at www.MichaelShedlock.com.
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