*Recorded November 6, 2014
VIDEO HERE
Geoff: Hello, and welcome back to Ask the Expert here on Sprott Money News. I’m your host, Geoff Rutherford. On the line today, we have Mr. Chris Martenson. Chris Martenson is an economic researcher and futurist, specializing in energy and resource depletion, and co-founder of PeakProsperity.com. As one of the early econobloggers who forecasted the housing market collapse and stock market correction years in advance, Chris rose to prominence with the launch of his seminal video seminar, The Crash Course, that interconnected forces in the economy, energy, and the environment that are shaping the future, one that will be defined by increasing challenges as we have known it. Chris’s insights are in high demand by the media as well as academic, civic, and private organizations around the world, including institutions such as the U.N., the U.K. House of Commons, and the U.S. State Legislatures. So with that we’d like to welcome Mr. Chris Martenson. Hello, Chris. Thank you for joining us today.
Chris: Geoff, it’s a real pleasure to be with you today.
Geoff: Now Chris, thank you for joining us. We’ve received a number of questions for you today. But before we actually get into the interview, Chris, I want to take a moment to talk about your own background so we can get an idea of your story. So Chris by age 40, you were Vice President of a large international Fortune 300 company living in a waterfront five-bedroom house in Mystic, Connecticut. Then within a decade, you made some significant changes in your life and your family’s life for that matter. Can you tell us about what prompted these changes and the results thereafter?
Chris: Yeah. I had done everything that I was supposed to do achieve what we call the American dream down here and I’m sure the Canadian dream is the same version, right? You work hard, you study hard, you advance up through your career. I was earning a very nice paycheck, I had a big house on the water, I had a boat in a slip a mile away. Everything was perfect and then 2001 came along and my portfolio was getting shredded and I started looking into the economy and how it really functioned and I found some things that frankly shocked me. Over the course of a number of years, about three years or so, it occurred to me that the life I was leading, the one where I was earning that paycheck and where I was participating in a job that I no longer really believed in, I lost my handle on that and it slipped out and I decided I had to do something differently, I just had to begin a new life for myself.
I set out to become an entrepreneur in the space of sharing information with people. Now my background, I have a PhD, it’s in a life science. I am a scientist by training. I think our training colors who we are, how we look at the world. For me, it’s all about the data, and nothing is ever certain because my training took a lot of statistics. I’m a pathologist by training so really nothing is ever certain. Well I could easily extend that sort of scientific background into looking at the future that I saw coming for the world, for my country in particular.
I started to gather other data that understood more intimately how the economy itself is not a real thing. It’s just an expression of how people take real things from the real world and use them to make real products, real goods and services. The economy is just a derivative of that. It’s an expression, it’s the way we count it but the truth is real value comes out of the world and I saw a world where I could easily see in the data that there was diminishing quantities of this stuff. I don’t care what we’re talking about looking at ore grades of copper, looking at how deep we had to go to get oil, or whether we were now power-washing it off of sand and calling that the oil sands in western Canada. I was watching all sorts of resources go into fairly steep decline, especially on a per capita basis.
Well wander with me back over to the economy, prosperity is measured in increasing amounts of stuff on a per capita basis. So I saw a population increasing on the one hand, I saw resources stagnating on the other and worst of all, I saw a money system that was absolutely built to survive if, and only if, it can continually expand exponentially. So I saw all of these big pressures coming, and I said, “Wow, there’s going to be some changes. I’d like to get in front of those changes myself.”
And so that’s what I did. I quit my job, I moved to a whole new location. We started a nice garden and raising some animals, just because we think it would be good skills to have, not with any intention that we’re going to raise 100% of our food but we just shifted our friends, how we educated our children, literally everything changed as a consequence of the material that’s now been contained in The Crash Course. And people can view it there and decide if they see the world the same way but that’s how I see the world utterly shifted who I am, what I do, how I do it, and led me in a whole new direction professionally but frankly, I’m really glad it did.
Geoff: Fascinating, Chris. Fascinating. We have a number of questions actually. Some in regards to obviously the economy, some in regards to precious metals and likewise, even energy sources such as oil and electric for that matter. So let’s take a look at the first question. “When the talking heads speak about the price of gold going up, they seem very excited about the price increase. When this increase occurs, Chris, it’s not going to be the usual cycle. This would be the end of the dollar as we know it. What could ever enable the return of the dollar when this crash occurs?”
Chris: So let’s just start with when we say the dollar, a lot of people, in their heads, they think of a physical paper dollar. There are very few of those, relatively speaking. There’s a lot more of them existing in ones and zeros on hard disks that represent dollars at the bank. People get paid, they may never see a dollar in the transaction of drawing a paycheck, having the paycheck deposited electronically into their account and then their account being electronically dinged and debited through various transactions. So when we say the dollar, most people are still even though thinking of those too which includes the currency of a nation. But the money supply of a nation, as I understand it through my economic study it includes the credit market instruments that are also developed. So if I own a billion dollars worth of treasury bonds, I’m a billionaire. Even though I’m not holding money, I’m holding a debt instrument. Debt and money are the same thing in our system – that’s a very important insight.
When I look at the total amount of credit money in the system, and it’s not just U.S. dollars, it’s across the whole system on the globe at this point in time, they’re just increasing like crazy at much, much faster pace than either the underlying economy but more importantly, especially in reference to the precious metals. Those tend to go up at a very discreet and steady sort of a rate, in terms of total global supply. You measure that in the very, very low percentages each year. And so yes, our press very excitedly notes I think most excitedly notes when the price of gold goes down. I see that trumpeted all over the headlines, Wall Street Journal will throw that front page as soon as it happens. When it’s going up, you get this other sort of muted response. My press, here in this country, does a very good job of trotting out experts explaining why gold is not a useful asset and it doesn’t generate any interest like bank accounts do.
When I’m looking at the price of gold here and there, the price is no longer as important to me as a measure because I truly believe that for reasons we can get into, if our central bank is not controlling the price of gold, they are doing their jobs very poorly because they have engineered a condition for us called financial repression, which requires you to take your people, the populous of a country, and forcibly place them under your regime of financial repression. The cornerstone of that is negative real interest rates. Another piece of that program is making sure that they are corralled inside of that arena you’ve got them stuck in, which we’ve done by making it very hard to move currency offshore if you’re an average person. And a third leg of all this, of course, is having the price of gold contained because you can’t give people an option. When you’re going to put them under a negative real interest rate regime, what you’re saying is, “We are going to take your purchasing power from you.” It’s essential if you’re going to run that program, and we are. They’ve said that we’re doing it, so we’re doing this. When you’re taking people’s purchasing power, you cannot give them a way to escape that. You can’t. So that’s the regime we’re in.
So what’s happening? I trust that when people say they’re going to do something and then it happens, they probably did it. So that’s the only last part we’re arguing about sometimes in some quarters is “Have they done it?” To me, they would be derelict in their duties if they aren’t. I no longer track the price of gold because I think it’s being moved around for a reason that I understand. I don’t agree with it, but I understand it, important distinction there. And so what I track is the fundamentals because fundamentals to me are always going to reassert themselves.
When I’m looking at charts, for instance, of how much gold is being extracted on a monthly basis from the Shanghai Gold Exchange, and note that that is approaching 100% of world mine output, and then I wander over and look at India’s import numbers and I see that those too are a very, very large fraction of world mine output, and I see the same dynamic happening in Vietnam, Thailand, Indonesia, Middle East. I see these numbers and I say, “Wow, this can mean one thing and one thing only. There’s a shortage of gold. It’s being supplied from the West. The East and the Middle East is rapidly gobbling it up. That’s all well and good.”
That’s a fundamental story that the price, unlike what my country puts forward all the time, which is like, “Oh, look. Gold is falling. You want to hate it.” Every time the price goes down, the rest of the world buys more of it. It’s almost like there’s this strange supply, demand, and price curve that you could draw that says they’re related in some way. It’s crazy. I’m being sarcastic, of course, but they are related and the rest of the world responds appropriately. And so I’ve been watching this just with growing fascination.
Particularly, there was this massive hit to gold that it took right in consequence to Kuroda, the Governor of Bank of Japan, announcing one of the largest expansions and surprise expansions of monetary printing that’s ever been announced by any country, and on a percentage basis, it’s the largest in the world, proportional to their economy. It’s like Japan has just announced they are going to print, if they were the U.S, three trillion dollars a year. It’s astonishing. 100% of government debt, fully monetized, maybe more. It’s astonishing. Really, the response we’re supposed to accept from that is the price of gold gets whacked? Only in a world where central bankers have to have the price of gold go down as a way to substantiate and validate that decision that they’ve made.
Meanwhile, I’m watching gold just fly out the door and go and head east. I’m very comfortable, if not a little aggrieved that my central bankers think they have the mandate to play with our lives in this way. But beyond that I’ve actually been somewhat thankful having purchased more recently and considering this to be really a last gasp, very desperate measure if we know what we’re looking at. I’ve got to tell you, Geoff, that everything I’ve seen happen these past few weeks in the central bankers says they are deathly afraid of the Franken-markets that they’ve created.
Geoff: Now Chris, again taking a look at precious metal manipulation, what do you say to the people who say it doesn’t exist, it’s a farce, it’s a falsehood? Particularly at looking what’s happened in Japan with quantitative easing, and they’re increasing their stimulus and we can see what happened to the price of gold, which is obviously the opposite of what should have happened. What do you say to people who say that it doesn’t exist?
Chris: What I say is that those people are just not paying attention or they’re blinkered by their belief systems. I think what most of them are saying is they don’t want to believe that’s true. Everything that the central banks have shown that they’re going to do whatever it takes. They show that they have absolutely no limit to this. They are all in on this story. There’s really no way to go back on this at this point. There’s no way for them to unwind what they’ve done. They have to go forward, they have to see this program through. It’s absolutely essential that people don’t see any cracks in the story. What I say to people who say, “Oh, no. Debt manipulation? How dare you suggest it?” I say, “Listen. I’m suggesting it because if I was in the central bank position, it’s exactly what I would be doing. They’re smart people and if they weren’t doing it, they’d be derelict in their duties. It’s a very obvious thing for them to do. They have to do it.”
Plus, I mean, come on. You look in history and you see all the other various times that they’ve manipulated gold secretly. The London Gold Pool, Rubin’s strong dollar policy, all of these things are well known. It’s just a mystery to me why people can say, “Oh, yeah. People did that then, they did it then.” They did it then? “You’re right, then too, but not now.” That’s crazy. It’s like if you have neighbor who tends to steal things from your house and they’ve done it four times, I’m not the person who invites them unescorted into my house. I’m one of those people who tends to think that once people have shown that they have a tendency to do something, they’ll keep doing it unless they’re forced to stop.
There’s nobody peering into the books of the Federal Reserve at this point in time in a way that could A, unearth that this is happening, and B, there’s nobody with any appetite to stop it, even if they did see it. Again, it’s as simple as this the Federal Reserve and other central banks have to control the price of gold because the alternative is to cast doubt on a system that can stomach no doubt at this point in time. That’s the crazy world we live in.
The opportunity in that for me, Geoff, is that I think that small committees of people tend to make enormous blunders when they’re trying to control the prices of everything. And let’s be clear, what do we admit? The Fed controls the price of money by which of course everything is a derivative of. So when you distort that, you’ve distorted everything. They’re controlling interest rates on the long and the short end of the curve, driving junk debt down into the 5% range, where it’s never been historically. It’s extraordinary. They are actively monetizing government debt because they think they know the right level of fiscal support they should be providing to the nation. It’s astonishing, the hubris that they’ve taken on.
In the context of this, I think they think they know best what the prices of everything needs to be. Houses, oil, gold, wheat. I think they’ve got everything on the radar screen, working like crazy. The opportunity in that is that they’re going to make mistakes. Nobody can macro-engineer every little corner of a major economy. Nobody can. Some people maybe think they can. I’m not one of them.
Geoff: So Chris, even from that perspective, let’s take a look at a question from one of our listeners here. “Could the USA make it illegal to buy or sell precious metals, thus producing almost the same effect as confiscation? Could one still sell metals overseas?” What’s the likelihood of this happening, Chris?
Chris: Oh, absolutely they could. I think that the United States will perform other capital controls in advance of that one. The only reason the U.S. would do that is if some major bullion bank or set of bullion banks got into a lot of trouble. Could be an HSBC, it could be a Scotia-Mocatta, it could be J.P. Morgan, it doesn’t matter, but if one of the big ones gets in serious trouble, and they’re worried about systemic risk, I think rather than saying, “Hey, this bank just jumped the shark and got itself into a set of debts that it can’t possibly unwind without experiencing some severe pain. We’re going to let them work that out.” I could see the United States coming out and saying, “Oh, terrorists use gold, so we have to stop it.” That’s sort of been the pattern of late. That’s always a possibility.
But in terms of do I worry about it right now, the answer is no and the reason is that when we look at gold, even if gold went up to $5000 or $10,000 an ounce from here, even if it did that, it would still be a relatively small bump on the side of a very, very large world of perceived assets that exist out there. When a government gets in trouble, like they did in ’33, our government, the United States government, went bankrupt. It utterly went bankrupt. We spawned this thing called the Federal Reserve in 1913, and 20 years later we were completely bankrupt. The Federal Reserve, out of their great kindness, agreed to print up 11 billion dollars and swap it for all of the gold of the land and that happened. That was the United States’ first bankruptcy. We seized gold and confiscated gold and coughed it up to the Federal Reserve back then, because gold was money then. Gold’s not money today. It has a money-like aspect but it’s not really money in the system. If it became money in the system, I would be worried again because then the government would have more of a desire to seize it.
But right now, the first thing that I would worry about, the first step that would tell me we’re heading down a path towards this world of capital controls and confiscation that the reader asked about is I would see things like money market funds would be steered into special Treasury-only bonds. 401Ks would be forced into government type savings programs, which would be honestly government theft programs because that’s where the money is currently, so I’m really looking for a number of steps to occur before I really get to be worried about gold being high enough on that target list to think that they would go ahead and start to think about how they could effectively take that too.
So all I’m saying to this listener and anybody who is listening is that we’ll have warning that that’s coming. I don’t think it’s going to be a surprise that would catch anybody who is paying close attention really off guard.
Geoff: Now Chris, let’s take a look at energy technology now. “Is Tesla technology good enough for the major economies of the world to support having 15% of cars on the road being electric vehicles, as Norway has now? If this is in fact the trend, how do we facilitate the growth of the electric vehicle worldwide?”
Chris: When we’re talking about electric cars, I think they’re a great idea and we have to understand that we’re really talking about electric cars because you can’t run an airplane on electricity and trucks, you can’t run those on electricity yet. So when we’re talking about electric vehicles, we’re going to be moving more and more towards those. The issue I have right now is in respect to the balance and the mix. People look at these Tesla, and Tesla is busy making as many of these vehicles as they can, but it’s still… We look at the United States, selling 16 and a half million cars a year, and of those less than half a million are electric, or some number around there. I’d have to get the exact statistic, but it’s a small amount of the total. So every year even though we’re selling more electric cars than the year before, we’re completely swamping those by selling a lot more of non-electric cars.
So if we want to get serious about this, I think it’s going to take a little bit more than just market forces because the market force for electric cars is still niche right now. They’re kind of expensive. There’s no $8000 or $9000 electric car out there, because that doesn’t even cover the battery pack for a vehicle, let alone the rest of the drive train and the box and everything. So I like electric cars. Market forces on their own are going to take a long time, many, many decades to really crack into what I’ll call large percentage basis of the total fleet mix that’s out there.
Now we don’t have that many decades, as far as I’m concerned. In my country, we’re just alive with this idea that the United States is going to be the next Saudi Arabia. Our genius technology has unlocked these vast shale plays. But even according to the Energy Information Agency, the EIA down here, shale peaks in 2019. That’s holding all prices constant. If oil price stays where it is currently, we’re going to peak a lot sooner, because guess what? People aren’t going to be drilling at that stuff.
So what we’re seeing then, Geoff, is that if we’re peaking in shale oil in the United States in 2019, I’ll be generous, let’s say we don’t even do that ‘til 2030, which I think is unthinkable, given the data I have, even if today we snapped our magic fingers and we said, “Only electric cars are available for sale, starting tomorrow morning,” and people started buying electric cars at that rate of 16 million a year, we would discover it would take 10 years to swap half of our fleet. We get the 50% penetration once we go to 100% electric sales, and that still takes a decade.
Do we have a decade in this story? No, not if shale oil’s peaking in five years from now, and not if what we know about the rest of the world production continues on the trajectory it’s been on. We really are going to find ourselves needing a very substantial crash program of figuring out how we’re going to transport ourselves, sooner than later. If we don’t do that, my prediction is that eventually we discover we don’t have enough oil to move people around like we currently do. Whether we ration that with price, whether we physically ration that with little coupon books, I don’t know. But at some point in the future, we know that we don’t have enough to live life as we’re currently living it.
Again, this is a crisis and an opportunity sort of baked into one sentence. This is a real crisis for strip malls that are really far away, for small suburban enclaves that require a car to get around, for anything that’s super car dependent, you’re in trouble. Anything that’s not super car dependent is going to gain in this story as well. Because guess what? People just will choose not to live quite as far from where they eat, work and play. That’s the story that I see coming. So I’m not that hopeful right now that market forces are really going to deliver a good penetration of electric vehicles, for just those three reasons that I can summarize as time, scale, and the cost involved.
Geoff: Excellent, Chris. Now let’s take a look at agriculture now. “How do you see the practice of agriculture transforming over the next decade or two in North America? For example, will the central valley in California have to switch to producing crops that are less water intensive, or will farmland in Canada become more productive due to earth’s rising temperatures?” What’s your thoughts on this, Chris?
Chris: Agriculture, as it’s practiced, has been dependent on a number of things. First, and the most important, has been that the amount of rainfall that falls on the given area has been accepted as just how it is. And now, we have growing evidence that California, and particularly the central valley which was just mentioned, but a lot of the southwest more generally, has been under what’s been kind of a historically unusual wet period for the past 100-150 years. That’s right about the time people came and settled it and developed ideas about how much water they had to work with, and started farming certain crops in certain ways, and built whole infrastructures around the amount of water they had. If it’s true that we’re about to enter another 100-150 year centennial sort of a drier period, everything sort of gets tossed up for question at that point in time.
Now it never really makes sense to farm in a desert in the first place but it really doesn’t make sense if you don’t have the water supplies to do that. So there are whole regions that I think are going to be called into question, not just in the United States, China’s got a huge water issue, they’ve sucked down main aquifers that are now down to over 1000 meters deep, because they’ve been drawing that up to grow things with that water in a very dry area. Saudi Arabia’s main aquifer is actually due to be completely depleted within the next couple of years. They’re still growing wheat with it in the desert. There are a lot of things that don’t make sense.
I think we’re going to see the abandonment or the reduction of a lot of agricultural areas we currently use, just for the water reasons that exist. And you add on top of that any perturbations to the water flows that might happen because of climate shifting because of greater warmth, stuff like that. Those will only be additive to the stresses. So I’m actually quite bullish on the idea that certain agricultural areas are going to fair relatively much better as a consequence of this dynamic.
But more importantly, even the ways that we are farming, Geoff, in some of these high quality, good rainfall, deep soil areas, like the American Midwest, we’re farming these in a way that’s fundamentally unsustainable. Meaning, we’re burning through the topsoil, we’re turning it into dirt. We’re stripping out the nutrients, macro and micro, the liveliness of the soil itself is being degraded. And we’ve told ourselves, “That’s Okay. We’ll plant these GMO seeds and we’ll just pour the right chemicals on them.” Phosphorus, nitrogen, potassium, whatever else, herbicides. We’ll just chemically farm these things. We are now farming in places where the soil is no longer soil, it’s just dirt. It’s a substrate that we inject seeds and chemicals into, and use the sun and the rain to grow stuff.
That’s good if, and only if, you have access to these really high intensity inputs that you have to use now to farm in this “modern way.” Because those inputs are all just derivatives of energy. If you have plenty of energy, you can make all of those things, you can farm in that way. We’re looking at a situation where energy, over time, we know is going to become more and more and more expensive, unless there’s some dramatic breakthroughs that haven’t happened yet. But I’m keeping my eye out for them, but I’m a show-me kind of guy, and until I see those breakthroughs come and actually make it to market in a scaleable way and in a timely way and in a cost effective way, we’re going to continue to burn through our fossil fuels and we’ll farm with them.
This is why, Geoff, the most important number that people should have their in minds wrapped around is the number 10. There are 10 calories of fossil fuel baked into every calorie of food right now. It’s a hidden subsidy. I am walking oil and coal and natural gas, so are you. We all are. We should have a plan that says, “How are we going to get ourselves off of those 10 calories?” What are we going to replace those with? Is that going to be wind, is it going to be solar? We don’t know. So that we can get back to how it was for all of human history. Up until about 1930, farming was a net energy producing activity, not a net energy consuming activity. That’s a transition that I see is going to be playing out as we go forward.
And the areas and the places that get their arms around this earliest are going to be winners. And we’re seeing people do this, fundamentally changing farming practices in ways that actually build the soils up, in ways that actually make the farms more productive over time, and build the biodiversity in the soil and in the general farming practices. These are all possible. It’s going to require a shift, and so it’s really a large shift away from agro, chemical-agro business to something that’s more in line with how the world works and understands the complexities involved in running a sustainable farming operation. It’s actually very complex, requires really intelligent people working really diligently. It requires a little bit more thought that just scraping the land and putting the seed in and dumping some chemicals on it. It takes more than that.
So I am actually quite bullish on the idea that this is a very large growth industry but what comes with that is we’re going to have to get used to paying more, on a percentage basis, for our food than we have before. But that’ll be a good thing.
Geoff: Now Chris, kind of sticking with the idea of oil, “With new drilling and completion techniques, such as cemented liners, increasing production and end-use recovery per well by 75%, combined with 5.4 trillion barrels of tight oil in the U.S. alone, have you changed your outlook on liquid fuels?” This seems to be a question that was probably somebody who has listened to you, and they’re trying to see if you’ve changed your opinion on this particular topic.
Chris: Yeah, so 5.4 trillion barrels? Is that the number you just quoted at me?
Geoff: Yes, that’s the number I quoted. 5.4 trillion barrels is what they said.
Chris: Yeah. That number doesn’t appear in any literature anywhere that I’m familiar with. It’s certainly many orders of magnitude larger than what the Energy Information Association is quoting. It’s larger than anything the shale industry is quoting. It would be interesting to know where that particular number came from.
As well, I’m going to dispute this idea that there have been massive productivity improvements. It’s true, there have been productivity improvements. Most of those have come from process improvements. Mostly, we drill off of what are called super pads now, instead of creating a drill pad, putting a drill rig on it, and then drilling a single hole, and then shifting the whole thing to the next 160 acre spacing, what they’re doing now is they’re making one super pad, and they’re drilling down multiple times off of the same pad and that increases the per rig productivity.
But when we go to the Bakken Play, which is the best shale play in the world at this point, that is the poster child, it’s the best one, and we look at how much oil is coming out on a per well basis, and we look back over the last five or six years, those lines are pretty flat. There’s a very slight improvement in the number of counties. A couple of the counties are actually dead flat, and a couple of them have gone down. Overall, it hasn’t been anything close to a 75% per well improvement.
And this is with we’re drilling longer laterals, we’re using a lot more proppant in the fracking processes, all of these things are true. And yet, I think what’s offsetting the increase in technology is the fact that we drilled the sweetest spots first, and now we’re putting these longer laterals and larger proppant uses out into slightly less awesome parts of that play. And the reason that we might just back up and understand that in a shale play, the best spots get drilled first. That’s a no-brainer, everybody gets that. But to try and understand really where we are in this story, and how much additional improvements and how much additional oil we’re going to get out.
I think it came out a week and a half ago. Oxy Petroleum, a very large midsized, a very diversified oil company. A lot of sharp people work there, they know their business. They had 335,000 acres in the Williston Basin, and they chose to seek a price to sell that off for about 3 billion dollars. Now the question here was we’ve got increasing end EURs, the end-use recoverable oil that comes out, we have increased productivity. All of those things say we should be getting more and more out. So let’s wander back. 335,000 acres on 160 acre spacings should tell us, if we take the central idea which is that there’s 500,000 barrels that’s going to come out of every well over its life, and we just multiply all of this out, apparently Oxy Petroleum was willing to sell something that has over 200 billion dollars’ worth of oil, at current prices, for 3 billion dollars.
I’m the kind of guy, when I look at those things, I say, “You know what? I’m going to think that Oxy actually has some information that’s relevant here, that they know what the actual value of this thing is. They’ve probably not only asked for a fair price, but one that’s maybe even on the high side affair, because they’re looking to negotiate down.” It tells me that Oxy, in their best estimation, thinks there’s 3 billion dollars’ worth of oil in their 335,000 acre holdings. So that’s how I’m starting to get my hands around the idea of saying, “Technology’s great, it has improved. It’s been a lot less than has been advertised.” Because for some reason we’ve gone with per rig productivity, which is interesting, but it’s not as important as per well productivity. It’s the well that takes all the effort to drill, and it’s the well that gives us the energy back. That should be the key metric, and mysteriously, the EIA switched from well productivity to rig productivity a couple of years ago, and now I don’t know quite what to make of the story as clearly anymore. But I do know what to make of it when I see somebody like Oxy come forward and say, “We think these 335,000 acres in the Williston Basin are worth 3 billion dollars.” That gives me a sense of where we are in this story.
So I’m looking for some surprises to come out of shale, but I’ve got to be honest. To me, there’s still downside surprises that are larger than upside surprises. What I’m looking at here is how many of these countries have been operating on a junk debt basis, how many of them have been operating on a basis of spending a lot more in capital expenditures than they’ve been receiving in revenue. We detect that in negative free cash flows. This has been the nature of the beast up to this point in time. This recent fall in oil prices is going to expose who the weak operators are in this story. That’s a shakeout I’m interested in seeing. I think it’s a good thing, it’s a healthy thing. I think that some companies are going to be revealed as being better than average, and are going to be the ones left standing. I think that that’s where there’s some good investment opportunities, probably some great ones. But in general, I’m in that Warren Buffett moment of thinking that the tide’s going to go out and we’ve got to find out who’s been swimming without their shorts on here.
Geoff: Wonderful analogy, Chris. I like the analogy. Now Chris, let’s switch over to mining. “Is there a real chance that the Fed, or the central bank, would want to put all gold miners out of business? What’s the likelihood of this actually happening?”
Chris: There’s a very real possibility of that happening because the people who run the paper markets, they don’t care about fundamentals. They don’t care about people and they don’t care about mines and they don’t care about any of that stuff. They care about making money. They make a lot of money by being able to see the entire book of orders. They make a lot of money by being able to rig the markets. We’ve all seen the riggings. Anybody who wants to watch the tape understands this, it’s very simple. Somebody can see the entire bid stack that exists for gold futures, they step in at 12:30 in the morning, and they will dump 4000-5000 contracts into a very thin bid stack, blow the whole thing out. I don’t think they do that specifically to put gold miners out of business. They do that because they can make money at it. They know how to run the tables, as it’s called.
So I’ve been watching them run the tables without any sort of oversight, without any sort of inquiry, without any sort of meaningful regulatory views, which tells me that the regulators have no interest in regulating that particular scam that they’re running. So they run that. They’re going to run that and they’re going to be putting miners out of business. We already know of some that have gotten into deep trouble. There’s obviously ones that work on a cash flow basis, where their cash flows are negative so they need to go to financing markets. The equity markets are basically unusable to the miners at this point because that’s been utterly destroyed. So there’s a little bit of debt markets, those are starting to dry up. And again, we’re going to find out who’s really in trouble.
But try to act surprised, Geoff, when in a couple of years, these same bankers who were playing these paper games are the same ones who sweep in with cash, which they made out of thin air, and buy up all of these real assets that are now destroyed on the capital markets. They’ve done this over and over and over again. This is a very sort of tried and true behavior on their part. We saw Goldman Sachs doing this sort of behavior by locking up an entire value chain, wanting to own everything from the copper mines to the copper warehouse. Everything in that whole value chain, which gives them an extraordinary opportunity. They did this with aluminum as well. An extraordinary opportunity to really set prices in the paper markets and then give them an extraordinary real world advantage in moving the physical things around.
Because again, the paper is just an abstraction of wealth. The real wealth is actually the mine and what comes out of the mine. The real wealth is what the hard labor of people is put into taking that stuff and bringing it out and refining it and bringing it to market. That’s the real value so that it is ultimately a target that the banks have their eyes on. They’re looking very much to either be part of the deals that acquire those or help people acquire those. Again with money that came from somewhere.
So there’s some real obvious pain. I was just talking with the CEO of one of the largest silver mines just this past week and we are well below their cash cost of producing silver at this point in time. That’s true for a number of them out there. Gold is way below what we now know to be the all-in cash cost for the average miner out there in the world. Some are below this number but an equal number are above and so the whole thing averages out to a number that’s higher than the current price of gold. That’s obviously going to create pain. Mines will go out of business, and that will impact future supply. But to repeat, the people who play these games in the paper markets don’t care about any of that.
Geoff: Now Chris, here’s more of a general investment question from one of our listeners. “What can I invest in for a revenue stream and capital preservation as the economy deteriorates?”
Chris: I’m of the belief that we’re coming up, Geoff, on a period of time where all of these paper claims that we’ve developed in the world, and they’re very large… The world was at about 70 trillion dollars of total debt in late 2007. Today it’s over 100 trillion. We’ve piled on 30 trillion dollars of debt in the last six years, just in an attempt to keep everything going. I’m of the mind that many of those tens of trillions of dollars of new debts, equity, currency, of all the stuff that’s been printed, those are just claims on real wealth. That all gets evaporated at some point, either through a process of inflation or deflation. The jury’s out on which way we go, but it doesn’t matter. It means that the claims themselves get ruined.
So as a private investor, I think some of the most particularly as a smaller investor, the things that make the most sense now is not to think about, “Where do I put my money so that I get more cash flow back in the future?” That’s just one aspect of what we can do in our lives. A second form of investment, which business people understand, is you invest today to have a lower cash outflow in the future. There are many improvements that people can make in terms of energy efficiency to their houses that have very high, double digit, even triple digit returns, depending on how long the system lasts.
A simple example, for me, is solar thermal panels. These are just boxes that the sun heats water up in. So I no longer pay for hot water in my house after having invested in putting these boxes in. And that investment for me, just to put some numbers on it was about a $13,000 cash outlay. After tax credits came back in the next tax cycle, I had an $8,800 out of pocket expense for these. These are cutting my utility bills by about $1100 a year. So all things being equal, I have about an eight year payback, and the system’s going to last for 25 years. That’s the average life cycle of this system, at a minimum, so I think I can depend on 25 years. Understanding the cost of oil today, which is how I heat my water, I look at all this and this has an internal rate of return well over 100% for me. That’s a great investment. It’s guaranteed. My only risk is if oil goes to zero. That’s my risk in this story. Otherwise, this is a guaranteed winner for me.
And there are a number of investments that are like that where I think I would invite people to look for ways that you can put a little money in today so that you spend less money in the future. You can do that with energy efficiency improvements, air sealing your home, putting new windows in. All of these have calculable returns that are roughly not that hard to do. You can do this with putting in a garden, fruit trees, all kinds of things. These are all things that people can do on a small scale that represent a great investments today that will also provide you a better degree of resilience in the future. In my story around heating my hot water with the sun, if oil becomes difficult for me to acquire at some point in the next 25 years, at least my hot water isn’t at risk. At least I have ways of managing my life that are no longer tied to availability or price of oil. That gives me greater flexibility than somebody who hasn’t taken those steps.
Geoff: Now Chris, here’s a funny question from one of our listeners as well. Okay, so here’s an interesting question. “When is the paper gold market’s tail going to stop wagging the physical gold market’s dog?”
Chris: All right. When does the paper tail stop wagging the physical dog? Well, I don’t know the answer to that. They’ve been playing these games for a very long time. I do believe that there’s a moment coming when… Here’s the thing, we can all look at the COMEX statistics, and those are pretty widely disseminated, not hard to come by, and they’re usually only a week and a half old when you get them. But it’s actually a tiny drop in the bucket compared to the London OTC market, which is where most of the physical gold trades, which is where most of the gold that ends up in Shanghai and in India, where that gold originates and we have absolutely no insight into those markets. None of the statistics are published. Even people who work in that market can’t tell me anything because they only see a tiny crevice of it.
So here’s the funny thing. Gold is supposed to be this barbarous relic, and we shouldn’t care about it and it’s just dumped on price, and we talk negatively about it all the time. You’d think something you cared that little about, you wouldn’t care at all if somebody knew anything about it. It’s some of the hardest data to get your hands on is what’s actually happening in the gold market. I don’t know how much banks have actually leased. They don’t tell us, they won’t. The central banks won’t tell us how much they own versus how much they’ve leased. We don’t know how much gold is flowing out of the London OTC market, but Shanghai will tell us how much they received. There’s all this opaqueness built into this market.
Here’s all I do know, and all we can do is back up pretty far. We have some hard data and then we’ve got some softer data. The hard data is just looking at the physical amounts that India and China are reporting importing, and saying, “Wow, those are larger than world mine outputs.” So I know that somebody’s coughing up gold somewhere and I know that that gold has to be coming from Western sources because nobody in any Eastern sources has enough to supply the figures we’re talking about.” So that’s hard data. Again, but I don’t know who and from who’s stockpiles.
The softer data we have is when the Bundesbank, the people of Germany come forward and say, “We want our gold repatriated,” and the Bundesbank throws this huge stink. Pretends like it’s the hardest thing in the world, promises to repatriate 300 measly tons over seven years, and in the first year only manages five tons and then calls the program off. This soft data says that the Bundesbank is saying, in very clear terms, “That request made us really, really uncomfortable. And for reasons we can’t explain to you that are compelling, we’re not going to do it.”
And then we see, there’s a referendum in Switzerland, which still has a functioning democracy, where the people of Switzerland have put a referendum up for vote that says, “We want to have 20% of our physical foreign reserves held in gold, and we want all of Switzerland’s gold to be held here in Switzerland.” And the Swiss National Bank comes out and does its old uncomfortable squirmy dance and says, “Oh, that would really tie our hands together. There’s this liquidity that’s provided by having our gold in these major gold markets. It’s held in France, and it’s held in Ottawa.” I’m like, “Whoa. Time out, time out. You, Switzerland, are telling me that Ottawa is a bigger gold center than Switzerland? It has greater liquidity?” No offense to Ottawa, but that’s not a compelling explanation again.
This soft data tells me that there’s something that makes central bankers extraordinarily uncomfortable when their people say, “Hey, we’d like to see our gold.” And that soft data, make of it what you will, but the way I look at it is that if it really wasn’t a problem, and the gold existed, and they weren’t really caring all that much about it, they would just go, “Oh, sure. Whatever. We’ll hold the gold here. It doesn’t matter.” But it does matter. It matters a lot. We have to speculate into the reasons for that, but I can tell you that there’s always a major disturbance in the storyline whenever a central bank says, “We want our gold back.” And that happened with, again, measly 99 tons that Venezuela wanted back. It took all this difficulty for them to get their gold. It was just a big problem.
When, in theory, if all this gold existed and it was unencumbered and wasn’t sort of stuck in a lease chain which had multiple partners threaded throughout it, if it was just sitting there, if there were bars with numbers that belonged to somebody, it’s literally as simple as pulling it out, putting it on a truck, putting it on a plane, and putting it somewhere. I could personally move 300 tons of gold in a week. It would take me two days to figure out how to find a courier and to get this thing insured. It’s not a big deal. So this tells me that the physical market has got all this opacity built around it for a reason and that’s to prevent us from seeing into it clearly. And that’s because somebody considers it important to keep this hidden. That’s good enough for me.
When I combine that with the hard data of seeing how much gold is going from west to east, I can’t predict when it’s going to stop because I can’t get access to the hard data. If I had the hard data, if you could tell me how much London’s got, and how much is hemorrhaging, I can just calculate the two and it’s easy. But I don’t have that data. So at this point, all we can say is that there comes a point at which the physical hard stop is all the gold left from Western centers and ended up in China and India. We’ll stop this way before then. That’s a softer target. I don’t know when our personal uncomfortable point comes for the leaders in the U.K. and in the United States. But at some point it gets hit, and they say, “That’s it. We can’t have any more gold heading that direction.”
And so there’s really only two ways you stop that. One is you let price rise to a point that people in Asia say, “Can’t afford it, don’t want it.” There’s a natural price point there. Or two, you go ahead and just physically stop it in some fashion, and you just say, “We’re not sending you any more. You can’t have it.” That gets uncomfortable too because they own a lot of our debt. It’s going to be a moment and I wish I could predict when it’s coming. But I don’t think it’s going to be a COMEX default. Personally, I think it’s going to be an OTC London default, in the sense that they’re just going to say, “We don’t have more to send.”
Geoff: Now Chris, here’s a question about currency. “With the U.S. dollar getting stronger, or other currencies getting weaker, we’re clearly in a currency war. Don’t you think in the event of a crisis or recovery, when interest rates rise, the U.S. dollar will get stronger, and gold will get cheaper in U.S. dollars? Should we wait to buy in crisis, or recovery?”
Chris: I think that this is following an idea that Eric Janszen of iTulip put out years ago, which just fit my thinking so perfectly I’ve decided he nailed it first. He calls it the Ka-Poom Theory. The Ka part of this theory is the first part, where first there’s an implosion and all the money sort of runs back to safety. And that’s where you would see money running to the United States. Not because they think, “That’s where I want my money,” because there’s nowhere else for it to go. All of these carry trades that have been put forward and all of the financial speculation, even if you’re in Europe, you’re still taking out a loan to borrow money to speculate with and in many cases you’re borrowing in dollars. So there’s essentially been a synthetic short on the dollar that’s been caused by all this speculation.
The Ka- part of this story is this implosion where people say, “Oh, time for safety,” and they unwind their speculative bets. That, all on its own, just drives up the value of the dollar. And it drives capital towards the United States. That would be the first part of this story, you would see that. That’s going to happen for math reasons. That’s going to happen for legal reasons. It’s going to happen for speculative reasons that make sense. But it’s not going to happen because people are saying, “I’m that much more confident in the United States.” That might be part of the story, but that’s not why it happens. So the first part is there’s implosion and people get scared, and all the money runs towards the center.
And then once people have their money here, you get to the boom part of this story, which is where people go, “Well, now what am I going to do with it?” They look around, and they go, “There’s a lot of dollars floating around in this relatively small economy.” and that’s where, I think, you’re going to see this next part of the story, where we see the boom part, which is really repudiation of currency itself, where people start to say, and in particular, these vastly wealthy concentrated pools of wealth, are going to say, “Not comfortable with the paper expressions of this anymore. Don’t want dollars, don’t want derivatives, don’t want debt.” We’ll see interest rates start to rise at that point in time. We’ll see things become more expensive. And that’s where I’m expecting this story to flip into the next stage.
Again, my larger view is always that we have way too many claims outstanding against way too few real things. Historically, the only way that that’s been adjusted is that the claims get evaporated in some way. Whether we experience that as a bond market default and dislocation, whether we experience that as a Zimbabwe-like blow off, where the stock market went up 600,000% but inflation went up 2 million percent, so you still lost. I don’t know which way we’re going to go on that, but I can tell you that the pressure that has to be relieved is that our monetary and fiscal authorities are still pretending as if they can just expand the claims and that magically that’s the wag the tail part, that the dog is going to respond. It hasn’t. It hasn’t.
We’re coming on 10 years of sub-par global growth. I understand it in terms of high energy prices, but our monetary and fiscal authorities don’t get it. So they think they can just keep printing, and eventually the dog will start to wag, but it’s not happening. Eventually, the world figures out that they have the wrong model in place and that they’re running the wrong program. When the world figures that out, the world is going to do what I think any rational person would do, say, “I don’t want the claims, I want the real stuff.” and boy, that’ll be an interesting day.
These pressures are going to have to be released at some point, and that’s going to be something that when I counsel people, I’m like, “Look. You don’t want to wait for that moment to start happening because probably you’ll be out-competed, probably you’ll find it a very paralyzing moment in time.” What you really want to do is you want to make sure that you understand that this is the risk, these are the trends, this dynamic is in play, here’s how it’s always played out in the past, put all those pieces together and go, “Oh, well what should I do today?” Great. You need to get your finances under control, you need to trim your expenses as much as possible. You need to make sure that you understand that you own real wealth as much as possible because when the paper claims get eviscerated, it’s the real wealth that’s standing at the end.
And so this thing that’s coming up, this Ka-Poom, for me is a moment most people will say, “Oh, that was a huge period of wealth destruction. I lost my job, I couldn’t pay for my mortgage, lost the house.” They’ll say, “Ah, I just got destroyed.” But the truth is, if you look at this carefully, what happened was that your wealth didn’t get destroyed, it got transferred. And so that’s what I really talk about in my work is to try to help people understand what a wealth transfer is, how to know it’s coming, and how to be standing on the right side of the line when it happens.
And by the way, this is a big one. This is the biggest wealth transfer the world’s ever seen. And it’s going to take a long time to play out, because nobody wants to see it actually come to fruition. But I think it’s a mathematical certainty at this point.
Geoff: We’ve been speaking to Chris Martenson, who is an economic researcher and futurist, specializing in energy and resource depletion, and co-founder of PeakProsperity.com. We invite our listeners to go to PeakProsperity.com to check out what both Chris and Adam Taggart are saying. With that, we’d like to thank you, Chris, for joining us here today on Ask the Expert.
Chris: Geoff, it’s been my pleasure, and I hope people have gotten something out of this.
Geoff: Wonderful. And to our listeners, thank you for listening. This is Geoff Rutherford for Ask the Expert here on Sprott Money News. Have a great day.
SMN: Thank you, sir. And to our listeners, thank you for joining us today. This is Geoff Rutherford for Ask the Expert here on Sprott Money News. Have a good day.
Previous Ask the Expert Interviews
Ask the Expert – Dr. Paul Craig Roberts (September 2014)
Ask the Expert – Jeff Berwick (August 2014)
Ask the Expert – Eric Sprott (July 2014)
Here is the spreadsheet that generated the chart. Feel free to play with it yourself. Hopefully, more people will realized the value of going after a strong management team with a strong product amongst a disruptive opportunity. Focus more on the attainment of reward. Proper reward underwriting is its own risk management.
