Transcript for James Dines: Owning ‘Wealth in the Ground’ Is Your Best Bet to Surviving the Coming ‘Supernova of Inflations’

The following is a transcript for the podcast: James Dines: Owning ‘Wealth in the Ground’ Is Your Best Bet to Surviving the Coming ‘Supernova of Inflations’

Chris Martenson:  Welcome to another podcast. I am your host, of course, Chris Martenson, and today we are speaking with James Dines, author of the long-standing investment newsletter, The Dines Letter, and author of a number of books on investing, precious metals, and, interestingly, mass psychology. He describes himself as the original “Goldbug!” the “Original Rare Earths Bug,” and the “Original Uranium Bug.” And he has a truly impressive track record on timing entry and exit points in these markets for his subscribers.

Now today we are going to talk about the next big trends he sees on the horizon. As well, we are going to explore the roles human nature plays in influencing future events in unexpected ways. Of course, that is what we care about, is the future here.

Mr. Dines, welcome! It is a real pleasure having you as a guest today.

Mr. Dines: Oh, thank you.

Chris Martenson: So you have this incredible track record of predicting the big shifts and trends well in advance of the crowd, whether that was the Internet in 1997 or rare earths years before they hit the front page. What are the big trends and shifts that are really catching your attention today?

Mr. Dines:  The world right now is at a crossroads in a number of different ways, and it is going to be very important to make wise moves because of the crosscurrents going on. There is a conflict between those who feel political systems should be based on more force or more government control, and those who feel that there should be less government. That is expressed in the political system going on in America right now, in the political debates between the various factions.

There is also a religious war going on around the world. There is also a terrible currency problem, internationally, based on the fact that all paper currencies are not backed by anything tangible except the word of the government; that is, the result of which is that governments are able to borrow and spend basically as much as they want and run up frightening debts.

The debt levels are approaching truly dangerous levels, especially, of course, in Europe. However, with Greece in the headlines approaching bankruptcy, it is important to understand that the United States, itself, is on a road of debt accumulation that puts it on the same trajectory as Greece. Therefore, I have led my subscribers toward a number of areas that I think should do best, although there is no longer any totally safe place to hide – not even bonds, which are so overpriced that the yields are insultingly low and vulnerable to a serious market crash on their own. But, also, even cash is vulnerable to an eruption of hyperinflation.

One must invest keeping dangers in mind. The crashes in real estate and banks are a lesson that this is no longer a comfortable world where one can just buy some blue chips and go back to snoozing. As a result, we have focused on companies with wealth in the ground, hard assets that cannot be printed away. You can print all the money you want, but if you have a gold mine with gold in it or gold coins or gold and silver stocks, especially purchased on weakness, then you have a chance of surviving what is probably coming.

Chris Martenson: Well, what I am very interested to get your perspective on, then, is… I have heard people say there are a lot of comparisons to the 1970s…the inflation that we had then. Of course, we had wage and price spirals and there were a number of notable differences – the U.S. being a net creditor nation and a net export-positive nation, etc. However, with the differences noted, how do you see where we are today as being fundamentally different from the 1970s, if it is or it is not?

I have noted in some of your writings you have talked about how there is nowhere to hide anymore; I think in the 1970s you could choose an alternative currency, you could choose an alternative stock market, you could find another corner of the world potentially to go and hide in for a while. Now everything seems to be fully correlated – all the stock markets rising and falling as one. As well, all the currency is linked. In this world of interconnectedness and the high degree of correlation between nearly all of the assets, with gold being a fairly notable exception there, what are you seeing in terms of what is different this time and why we might not be able to use the 1970s as a backdrop for what is going to happen this time?

Mr. Dines: That is a good question. The similarities are numerous, actually. 1978-79 was a time of inflation in America and the government was truly panicked, as to watching it get out of control. One of the main differences was at that time the United States government bond market was in deep trouble. You were getting 12% on a U.S. government bond. At that point, the Dines Letter recommended loading up on them because that was a once-in-a-lifetime event; otherwise, it was very similar. The decision was made in Washington to run the printing presses even faster. So rather than take the decline and accept it, and wring out the excess debt out of the system, they decided to kick it up to stratospheric levels.

This is something that has been done a number of times before. When the U.S. currency was really sound, something very important… I think people do not really know their history and Santayana said, “Those who do not know their history are doomed to relive it.” In 1918, Germany was stuck with paying for World War I and they ran out of gold money two years later and began to run a printing press. They had a ferocious hyperinflation from 1920 to 1923, and then finally it was obvious they were not going to be able to pay for World War I. The allies made a frightening decision, in the 1922 Genoa Conference – which you will have a lot of trouble finding in your history books, but if you dig it out, you can. I go through some detail in my “Goldbug!” book – but they decided to double the money supply. That led to the boom of the 1920s – that was the inflation – and then the inevitable deflation occurred in the 1930s. All kinds of remedies were tried, especially running the printing presses and getting into more debt.

It worked a little bit, but then Roosevelt raised taxes again in 1937 and things caved in again. They were printing too much money. It was the wrong remedy. Then World War II came along and they began printing money again, and then we had another long inflation, and that hit a peak in 1980 – it culminated in the 1970s. We have basically been in a long deflation ever since, and we are in a deflation right now – this is the coming “great deflation” that I wrote about at the time. You can see it in the prices of labor is down, real estate, consumer electronics… all kinds of things are down, and right now they are trying to inflate just one more time. My Goldbug! book explains how this is going to risk going into a hyperinflation here in America. It is not a very pretty picture because hyperinflations always result in very bad things, so that means that even cashing in your safety deposit box might not be safe. It is a very difficult environment to invest in, and we are focusing on wealth-in-the-ground assets.

Chris Martenson: So, this hyperinflation – if and when it comes – Is this going to be a result of money that is already printed and out of the box? How do we square the circle where we have a lot of deflation happening? Obviously, when we look at total credit market debt we are seeing that, yes, the private sectors and government sectors are holding up reasonably well in the non-financial arena, but in the financial arena, of course, the shadow banking system – huge difficulties and a lot of declines there in credit overall. This deflation that we are seeing… we are seeing some of it expressed in prices. However, if we look at it in terms of money and credit… money supplies are up, M2, very robust graphs coming out of the federal reserve on that statistic, but credit itself is down. So where does this hyperinflation come from in your mind? Is this because there is a huge resumption of credit in the future, or is this already from money that is outstanding in the system today?

Mr. Dines: The QE1 was quantitative easing, which is double-talk from America’s Federal Reserve concealing the fact from those innocents who did not know the difference between what it really meant. In fact, they were increasing the quantity of money by trillions of dollars in QE1 and QE2, and they are talking about another trillion in QE3, now. Fanaticism is continuing doing the same thing you are doing, expecting a different result. The more money they print, the higher the risk of a hyperinflation. You said there is a robust amount of money out. Yeah, it is robust, but is too much money chasing the same goods?

My Goldbug! points out that gold needs to represent actual wealth being created. When you print more paper than actual wealth, you have more money chasing the same goods and services, so an inflation is inevitable. Right now it is falling on a deflation, so they are getting away with very low inflation numbers, and the economists cannot explain it. They do not understand why all this paper money is not creating an inflation, and all it is doing is deepening the deflationary forces that can be interrupted by a hyperinflation. Hyperinflation is what I call the “supernova” of inflations. While a lot of prices are down, you will notice some other prices are up. For example, here in San Francisco the price of the Golden Gate Bridge just the last ten years has gone up from a dollar to six dollars, which means your dollar’s purchasing power is one-sixth of what it was just ten years ago. That is a monopoly; it is a bridge and there is no competition.

Competition is holding prices down in some areas, whereas it is beginning to show up as an inflation in others. We are now at a crossroads of potential transition to a very dangerous time, and investing must be done with great care.

Chris Martenson: Well, this inflation… It is very spotty right now, and one of the criteria we need for that is to have the wage spiral as part of that, which is clearly broken for I guess global reasons, but unemployment is very high. It is hard for me to imagine that real wages are going to climb anytime soon here. At the same time, we see that for basic services that cannot be imported – college tuition, for one – running at a far higher rate of inflation than inflation itself, as measured by the CPI…

Mr. Dines: Yeah, that is evidence also.

Chris Martenson: Evidence, yes… and health care. So of the things which we really cannot import any of and there is really no global market for – Harvard has to be here and so does my healthcare – those things are running at extraordinary rates of inflation, very high, high single digits, maybe sometimes even low double digits, depending on what we are looking at. So in this world you are seeing of deflation and inflation, it is not really “either/or”… it is kind of a “yes” at this point, is it not?

Mr. Dines: Yes. [Chuckle]

Chris Martenson: So in this future of hyperinflation, is it also a “yes,” where you see some things could still be in deflation even as other things are becoming unaffordable and expensive? Is that a possibility?

Mr. Dines: That is right. That is why it is so confusing to people who do not really understand what is happening beneath the surface. They are now talking about QE3. Remember, this is an election year in America. Until November passes, we will not know what the government is going to do. Right now, they are trying to do as little as possible so they cannot be blamed for anything, but the hypodermic needle is in. Even notice the use of the words, “inject new stimulus into the money supply.” Money is addictive, and printing more of it has worked so well in the past that they think it is going to continue working.

But I recommend that portfolios take very special precautions, and we specialize in getting in very early to what I call “super major bull markets,” where the prices are so low and the gains are so assured that it really would matter less what goes on around it. Our latest bull market was in rare earths, and when I became the “Original Rare Earth Bug” three years ago, very few people even knew what they were. But these are 17 elements in the periodic table of elements that have very special attributes that will be extremely important in the future in anything from electric automobiles – such as the Prius – or in cruise missiles, military uses. Your cell phone is small precisely because it can employ rare earths. China has a virtual monopoly of 97% of the world’s production.

I was basically betting on a cartel, and I knew that the prices would go up, and, of course, they went up by thousands of percents. The actual rare earth elements went up in price, such as neodymium, praseodymium, dysprosium… but also we dug out the leading stocks in it and right now we are still buying and holding them. So, that is one way. You need to make money faster than the inflation is going to happen, which is quite a challenge, but just buying ordinary old investment ideas is not going to work in the coming period.

Chris Martenson: Well I would particularly apply that… I cannot… For the life of me, I do not know who is buying 30-year bonds at 3% from the U.S. Government.

Mr. Dines: It is crazy.

Chris Martenson: Forget the inflation risk, but where is the credit risk in there? There has to be… When you dismantle the balance sheet of the United States government, which you can do with a crayon and a napkin and a couple of drinks – it is not hard, there is clearly a huge imbalance there which is going to have to be resolved. It will have to be resolved either through printing or through a vast cutting of benefits or through some raising of taxes, which is just a transference of wealth. So one way or the other, we are going to have to pay that piper, and I do not see how that squares up with a 3% rate on a 30-year, personally.

Mr. Dines: Well, I do not think it is 3% – I think it is less than that. Second of all, it is taxable – do not leave that out, although not to foreigners, perhaps. If you subtract even the current low inflation rates from it of 2% BL (before lies), you are basically losing money owning it. It is the same as holding cash. It is not the salvation. Now corporate bonds pay more, but then again, you are running corporate risk. When you say you do not know how it is going to be paid off… it cannot be paid off. That is the understanding you must come to… If you get anything out of my work, you have to get that that is not going to happen.

They are borrowing money with no intention of paying it off. Politicians hope to be safely dead by the time it hits the fan. This year alone America is going to be running a deficit of 1.3 trillion dollars. Most people do not really even grasp how much a trillion dollars is. One trillion dollars. If you spend one million dollars each and every day from now on, back to the time of Jesus’ birth, you could not spend one trillion dollars. Right now America’s debt is approaching 15 trillion dollars, which are numbers used for astronomy. How is America going to earn that? With Facebook and Twitter corporations? Our industrial base is gone. Entitlements of fixed forced payments are a large and growing section of it.

We are in a number of wars – people do not even realize it is not just Iraq and Afghanistan. We now have troops in Central Africa, we have just opened up a base in Northern Australia for a stare-down confrontation with China, and on and on. America has unmanned drone aircraft in the Somalian – Eritrea theater – did you know that? I mean… America is at war in a number of places and reducing its military to save money. The whole thing is terrifying, and they do not seem to understand that the politicians are the inmates in the asylum running it.

Chris Martenson: Yeah, it does feel kind of late-stage empire-ish from time to time, and I note that the United States – I think this current fiscal year – is on track to spend roughly 100% more than it takes in in revenue. Clearly, not a sustainable condition. Any country that has ever gotten close to that mark before… I think 40% is a mark that Rogoff had come up with in noting that, historically, countries that have gotten over that 40% expenditure mark have suffered currency corrections, pretty significant ones. However, the U.S. is just not any old country, of course; it issues the main reserve currency of the world. What are your thoughts here? When I look at this deficit situation, I know it is getting some play in this political cycle, but not nearly as serious an amount of adult-sized conversation as I would have been hoping for, at this particular juncture.

Mr. Dines: Well, one example is our gold signal; the latest one was flashed 11 years ago. We are not day-to-day traders. I have never met a rich day-to-day trader. It might work for a little while, but then there is one big loss that wipes it all out. We got into gold 11 years ago at around $300 an ounce, and recently it got up almost to $2000 an ounce. We got into silver at $4.50 an ounce at that time, and that recently got up almost to $50 an ounce, so we flashed a sell signal on it. These huge gains are impressive, but they are not really gains. Out of our 65 Dinesisms, the number seven is the toga, the “Dines Theory of Gold Relativity,” and it is hard to imagine this, but the price of gold and silver did not go up. It is the paper money that went down. Gold and silver are the ultimate money, coins of which are good anywhere in the world, no matter what is stamped on them, and that is the money. Depending on the amount of paper each nation prints is the price of gold in that particular country, or in that particular currency.

That is one way we were protected by the price of gold. Gold is the only investible asset in the world that has gone up the last 11 years without interruption, and that is because they are just running the printing presses. The more they do, the more value builds into gold and silver. Now of course, it will have its fluctuations. It went down in the 2008 crash but came right back up and made new highs. We tend to ride those out, and it is very important understanding what the main trend is. When you are really clear what is happening in the world, you know how to place your bets, instead of doing it blindly or just following casual recommendations from people.

Chris Martenson: Well, one of the biggest trends that I have been tracking that I formulate much of my own investment thesis around and which I have been working very hard to alert people to and work with my subscribers on is around the idea of peak oil. We have plenty of admissions in data now…tons of data… that says we are past cheap oil. So the easy stuff has all been found. Of course, that is what we do as humans – we high grade our best resources first. We go after the easiest and most capital-returning prospects that we possibly can, whether we are mining gold, we are farming soils, or we are pumping oil out of the ground. Same dynamic. I am wondering what your thoughts are on the idea of the structural shift that is contained in the idea that we are out of the cheap and easy energy, because energy is not any resource – it is THE master resource from which all of the resources are required and built upon. What are your thoughts around where we are in the energy story right now?

Mr. Dines: Energy is, of course, extremely important. We have been writing in recent years about the coming resource imperialism. I founded the neo-Malthusian school of economics, which says that the planet is limited and the population is soaring. By brute logic, it is obviously unsustainable. You cannot just keep having more and more people on the same planet without, someday, sooner or later, running out. The nations that perceive this would start buying assets with that in mind. The primary example, of course, is China. They are wide-awake to what I have just said, and they are buying vast tracts of farmland in Africa, Australia, and the American Middle West, everywhere…as much as they can get…because holding land is better than holding paper that is depreciating. They are also buying copper mines and I have already mentioned rare earths. They were quietly buying up that industry while America was snoozing. I was screaming bloody murder about it but… For example, they almost got away with Union Oil, and it is a barely concealed asset that is now America’s only rare earth mine that will be functioning in a year or two.

So there will come a time, in the not-too-distant-future, where the last new copper mine on the planet will be found. Hard to believe – because there has always been more – but with the world’s population soaring into the billions on an accelerating uptrend, something is going to break. Along with the currency going to break, things are going to be happening here from out of nowhere. Because when you are going at high speeds toward a brick wall in the dark, things can happen very quickly.

It began to crumble, I think, in the crash of 2008. The banking system began to feel it. So in terms of energy, there is no question that peak oil is somewhere around here, Hubbert’s famous prediction, America’s peak oil. At the time he made it, America was the great oil producer. In the 1950s – it was only a half century ago – he said that American would reach peak oil, and it certainly has been true here. The large oil discoveries… Occasionally one comes in offshore – Brazil, there are probably going to be one or two somewhere – but basically you are setting that up against the fact that in Africa, for example, they are going to eventually want the American dream. They are going to want cars and all the uses of oil and production of plastics and all the other wonderful things that come out of crude petroleum.

So the rapidly increasing demand and the shrinking supply of oil, despite any short-term oversupply, which is probably true now… is going to lead to a stratospherically higher oil prices. As soon as the military grasps that they will start needing to put windmills on airplanes, they will seize the remaining supplies and you will not be able to drive your car until the last drop. At some point there are some very disruptive changes coming to society. That said, it is very important what is happening in the fracking field – fracturing rock and the new technologies, wringing the last few drops of oil and natural gas out of rocks. This has suddenly unleashed a whole new supply, which is changing the dynamics of it and might well postpone…not peak oil but peak energy. There is so much natural gas in America now, that the price in the commodities futures market is down to $2.50 and threatens to go even lower, and you are starting to get production being turned off because they cannot function at these low prices. I am not sure how that is going to play out. Of course, I personally think that we should leave it locked up there for two or three centuries from now when the world is going to be shivering in the dark. However, American and the rest of the world are simply using up the assets in this generation at a rate far greater than anything done before, and there are plenty of nations that do not have natural gas reserves much the way we do. America is now the Saudi Arabia of natural gas, and we will probably liquify it and sell it as LNG all over the world until we are out again, just as we began to run out of oil, using every last asset.

You must remember… these are not renewable assets. These are our inheritance, and they can be squandered, and that is what the world has been doing. On a lecture tour of Australia, I told them to be very careful about all the mines they are selling to China because those mines will be sending product to China for the next few centuries until they are used up; China is not buying them to resell at a higher price. This is what I meant by commodity imperialism.

Chris Martenson: Well it is just fascinating. We are at this unusual period of history and it is happening so fast, I think it is difficult for a lot of people to grasp. Here is an interesting statistic: If somebody is 22 years old today, he or she has been alive when half of all the oil ever burned throughout history has been burned. We have been using it since 1859, but really, when you compound your use of something at 1, 2, 3% a year, it is the last few decades that really count in that story. Here we are at a very interesting sweep of history where either we are at peak oil right now or in ten years. In some respects, I do not care if it is now or in ten years because that is a blink of a historical eye – it is happening now, by all intents and purposes.

When I was talking with Jim Puplava in an interview recently, he had a very good point. I love this phrase. He said, “Oil is the new Fed funds rate,” meaning that in the past when you had ample resources and everything was a function of money, we just put more money into the economy – it comes back to life and people go out and get more oil or other resources. It was your Fed funds rate that sort of dictated your total level of economic activity. But, if energy is your master resource (and now the price of oil is somewhat immune to whatever you are doing over there on the monetary side, except it tends to respond when you print too much of it), the oil at $100 a barrel is not really consistent with any economic recovery that I can find in the historical series. That is part 1.

Part 2 is we see that our total debt loads are going to require extraordinary economic growth if we have any hope – and I am going to use the word ‘hope’ very carefully here – of having those debt piles resolve themselves through the normal mechanisms of a resumption of economic growth and a tame level of inflation. We sort of continue to build them, even as we are digging out from under them. I am looking at energy now as something that I do not believe anybody on the federal reserve board understands in the way they need to in order to begin to combine what is happening in energy from a structural geological standpoint with how we operate our monetary system and the policies we implement and the decisions we make. I think there is still a huge gap there. Fortunately, that means there is a huge gap there that people who are clever and can see this coming can exploit that gap and do reasonably well. However, on balance, I think this story ends relatively poorly and it ends poorly for the money system. Energy is a function of reality – it is physics, it is nature, it is reality.

I think it is the money system that falls apart in this story. That is sort of the angle I have been going toward… looking at peak oil not as a matter of theory, not as a religion, not as anything I particularly believe in, but a set of facts and observations that lead me to conclude there is a higher possibility and probability of seeing a crackup in our money system. And this time it is global. A higher possibility of a crackup in the global money system, by which I mean the fiat money system born in 1971, than at any other period of history I can really look at. This feels unique to me in that way. Do you have any resonance with that sort of set of confluence of ideas or does that make sense to you? I know you have been at this a lot longer than I have, and one thing I worry about is that I am just a new guy looking at new information and thinking it is all new when, in fact, it is just an old story and it will repeat again and again.

Mr. Dines: You are on the right road, in that the price of oil is comparable with the price of gold. It is a one-time asset that the Saudis are wisely taking the money for which they sell it and buying hard assets, including gold, but also land and real estate. Again, this is economic imperialism. Oil is reality, and you can print all you want, but the amount of oil remains the same. I think energy is very important, and the question is how you play it. If you are an owner of oil, whether it is in the fracking oil here in America or elsewhere, you are just selling a capital asset – you are selling an inheritance. That is one thing.

However, the question is how do most of us who do not own oil fields play that? That goes one step further than your sound perception, and the question is, “How do you play that?” Well you can buy oil stocks, and that is a good idea in the vagaries of those that have crude reserves. That is why I think Exxon has been so strong, although they themselves are now moving into natural gas in a big way. They themselves realize that the large fields have been discovered already or that the political situation in them with stinky-finger politicians makes that untenable.

I am playing it a different way. I was the “Original Uranium Bug” when uranium was $8 a pound, and it went up to $138 a pound. Perhaps I should have sold it there but I was taking a longer view, and it has come back now about halfway – it is about $60 a pound now. I think it is also going to go much higher because, beyond oil, you have uranium, and for money that you want to put away for the long-term, I think that is one of the areas. The 2008 crash and again the crash last year – and by the way, we did have a crash last year, in 2011. The crash was concealed by the Dow Jones Industrial Average being up when just about every other average in the world was down, and some by 20% or more, and the low price stocks had huge drops, all of them. Nothing survived – but that makes them even more underpriced. We are getting, just in the last few weeks here, just in January alone, some of the uranium stocks that we like… fish and energy is up 27% just this month, uranium energy is up 37%, Palladium up 40%, Uranerz up 43%, and Laramide is up 56%, so you are getting a tremendous rally. This is how you make serious money. If you can make 56% in one month, you could outrun inflation. Even in a deflation, who cares? That is even better. Therefore, it is a question of how you play.

Yeah, your perception of peak oil is correct, but there is also the factor of natural gas fracking, and also how you play it. I am playing that oil boom by investing in the fracking area and also in the uranium stock mining area. They are still selling for pennies here. I think there are way more higher prices ahead.

Chris Martenson: Interesting. I am a big fan of what we can do with natural gas. Of course, there is an extraordinary infrastructure build-out that will be required for us to begin to use it in any meaningful percentage way for transportation, for instance. We know how to build natural gas electricity plants and we are doing that hand-over-fist, but to rea