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Stock Trading Volatility Index

Posted On: 2006-11-15
Length: 1:06:36

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Welcome everybody. Yes it's time for another edition of Vigilant Investor live every Wednesday night, 9PM we're here to entertain, to provoke thought and hopefully widen your perspective enough so you can better connect the dots out there, one of our sayings is don't be a fall guy. And, heavens me oh my oh, there 's a lot to be watching out there to avoid just being, just another one of the sheep and we don't want you to be that, so keep on tuning in regularly every week, like I said, Wednesday night 9PM except, unless it's preempted by a holiday. Next week we've got Thanksgiving popping on up here, and we're going to do our show Tuesday night at 9PM instead. So we're just going to move it up a day ahead, but everything else will remain the same. So if you happen to be listening streaming live welcome aboard, my name is Johannes Ernharth, your weekly host and tonight we have an interesting show lined up for you. You can call on in, we're going to actually have an interview that's prerecorded, not really an interview as much as it is actually a conversation with Doug Wakefield of Best Minds Incorporated down in Dallas, Texas. You may recall that we chatted with Doug probably mid August or so, we had a great conversation back then and Doug and I have since been keeping in touch even more just relative to the developments of what's going on out there and we had a good chat last week and we just decided to record what we were talking about, and I figured it would be appropriate material for a show to hopefully give you a little bit of perspective about what we're thinking as people that do what we do. Doug has been, I'll let Doug speak for himself when you can listen to the interview. But anyway that should be fairly interesting, we'll be airing that in just a few minutes from now. But, outside of that by all means feel free to call on in. One of the great things about Talk Shoe is participatory, we will have after the interview plenty of time to answer questions and engage in a conversation. And we had a really long interview last week with G. Edward Griffin, the author of The Creature of Jekyll Island, among other things he's a film producer and everything and that went on for probably over an hour and we had people sticking around afterwards who had a lot to talk about at the end of the show so, very nice, good fun and you get to be live participatory even if it isn't part of the recorded show, it becomes part of the Podcast. But, if we're within the hour time frame that we like to keep things, you definitely get to be part of the Podcast as well and that keeps getting more and more popular every week with downloads and so forth. But, if you want to participate, (724) 444 - 7444 is the number to connect with the show and you need to know our Podcast id. which is 982 and when you dial on in if you haven't already registered with Talk Shoe, which I highly recommend you do, here's one of our pre-fab what they call PIN numbers, you need a PIN number to get in through this, and the interesting thing is that it's not just one caller that can be online at the same time, multiple callers can be chatting simultaneously carrying on a conversation. So, it pays to have your own Talk Shoe id. or excuse me, your own PIN number. We have a couple of pre-fabs for those who just want to call in and quickly ask a quick question moving on, that's 222-333-4444, 222-333-4444 and the other one happens to be 333-444-5555, so you can use those to call into the show any time you want. And if they're taken though, they're taken, so go on to Talk Shoe and register. The other great thing about going on to Talk Shoe is you can be part of the Talk Shoe interface where there is live chat, live IM going on there and you can see the conversations that area happening. And, what we like to do when we air interviews like we did last week with Ed Griffin and this week with the conversation with Doug Wakefield is we have chats that go on simultaneously. So, you can participate in that as well if you are interested. But enough gibber jabber about sort of the standard things that you need to talk about, they call it housekeeping in the business. A couple bits of news I guess everybody noticed today that the Dow Jones Industrial of course hit another new record and boy we can't say enough that a new record is very much in nominal terms as opposed to real terms, of course real verses nominal is when you adjust for inflation. If you want to get a new real high in the Dow Jones Industrial, again we've been saying this for weeks now, you need to have 13,800 Dow to break where we were back in 2000, the last time the Dow hit a real high. Now, we can all get excited about the Dow breaking the old threshold there, but it's kind of meaningless because really when you adjust it for inflation we're just over 10,000, so really we're between 10 and 11,000 if even, I'd have to re-look at the calculations since we hit 12,251 today up 33 points. But Nasdaq of course is up today 12 points, 2,442 and the S&P at 1,396.57 and an interesting thing about all the markets going on right now, we, you know, a lot of times what we talk about here are some of the things that we've posted in the past week, and today we had a post up on vigilantinvestor.com, which is of course always a way which you can find our past episodes with Vigilant Investor live, is go to vigilantinvestor.com, we're basically talking about the volatility index that trades on the Chicago, think it's the mercantile exchange, really basically what it is, is traders [...] amount this derivative to determine how much volatility they're expecting in the markets and when the price is very cheap there is very little expectations about volatility and the price gets higher and higher, that means people are basically thinking there is going to be more and more volatility. And that's just the way people have of insuring their portfolios against volatility, is by playing that little game there. Derivatives are pretty crazy things, but lots of fun. But, in any event what you get with VIX index it's called the VIX among the people who pay attention to the VIX has been at historic lows and very rarely does it get as low as it is, meaning not a whole lot of expectations of volatility meaning that if you want to buy protection against volatility you can get in there fairly cheaply. And you know, historically, you know there's a lot of mixed reviews on it, I think a lot of people look at the VIX and say, "yeah, it's not a very good contrarian indicator," but generally speaking when we get these very high, very, very high levels of overconfidence I guess I would say, overconfidence, complacency, call it what you want when it gets down to the VIXs trading at such a low level, ordinarily it's an indication of complacency. It means people are very comfortable and perhaps even too comfortable when it's trading as low as it has been and for as long as it is. Now, anything like that taken in a vacuum has limited reliability as an indicator and we referred to that today in our article, we talk about market watch, I think it was the article that we reference where they talk about it. But then they go on in that article just to dismiss it and say, you know it's not really all that reliable and I say to that, well heck you got to look at it not in a vacuum, you just can't look at it in a vacuum, you have to basically make sure you're gauging all these other variables. Of course we go on to list the various variables or at least touch on them in our article. But beyond that, it's something we document every day at vigilantinvestor.com with our journal and of course we talk about it week to week here. So, just interesting to see basically the expectation of risk on the VIX are super low, and that coincides actually when they do studies out there, a lot of people don't realize this but they take what they call trader sentiment evaluations to get a feel for what the traders generally are thinking. So, the go out and survey brokers, they'll survey the big traders out there and various market makers and so forth. You get a feeling for how bullish they feel, and they'll also even take a look at newsletters, how many are bullish, they'll go out and take a look and study how many buy recommendations there are verses sell recommendations on specific securities. And all these ways are gauging, you know, how the markets feel about what's going on. Overwhelmingly these things are at extreme highs. One of the trader's sentiments for example has been trading above 90 for the longest it ever has. And ordinarily any time it gets above anywhere between 50 and 70 you start worrying about maybe a little too [...] But once you're considered above 70 historically you're talking in the, you know, getting a little irrationally exuberant here. And yet nobody seems to mind that we're up in the 90's and staying above the 90's. What that tells me is just that people are way too confident with the ability of the Fed to manage and people are not paying attention to the credit bubble and the infrastructure problems that the credit bubbles create as well as money supply, over extension of money supply and how corrosively it ends up really wasting away your economy. And certainly on the surface the economy doesn't look all that horrible, but when you start digging around, boy I think people are going to be surprised by what develops in the next, boy could be very short term. You never know what things can eek out stretch out for another 5 years or who knows how long. I mean predicting the timing of unwindings and so forth when you get into these very deep recessions is almost impossible. Nonetheless, we have a lot of concerns out there. But enough about the VIX, you can read our article, take a look at the links and of course go back through our past 365 days of Vigilant Investor and get all the reasons why we're not too excited about what's going on there. Another post that we covered this past week was hitting another milestone with the U.S. debt crossing the threshold, boy these hundred billion dollars just seem to pass in the blink these days in terms of how much federal debt we can have. 8.5 trillion, say goodbye to 8.5 trillion of debt. That translates into an awful lot of debt per individual, think for a family of 5, that's about 120 thousand dollars of U.S. federal debt that's on your shoulders right now and that's just going to keep growing because there's not any chance of that changing. But in any event 8.5 million climbed to 8.6 trillion and we expect any changes with the democrats in there? No, I expect a rearranging of the deck chairs and you know deciding who is going to get what and how the pie is going to be sliced up definitely is going to probably change, and will definitely probably not terribly certain there, but I would say without a doubt it will change relative to who is going to be getting more slices of the pie and who is going to be paying more. But the bottom line is that the breakneck spending in Washington never ceases, they've redefined what a cut is, a cut is simply an adjustment in the rate of growth downward; in other words we're growing 11 percent and you knock it down to 9 percent you're still far above inflation and still growing at a breakneck speed. But according to Congress that's a cut. I wish I had my kookoo clock sound right now because that's exactly what it is. But, in any event, other issues we talked about the past week I think are worth taking a look at. Well, short-term affair with federal debt, we talked about that just there, but another subject hitter was the market gains driven by inflation. I recommend people take a look at that because I think inflation is definitely bleeding into the equity markets, people don't realize it, but people really need to take a look at subsections within the sectors within the markets that are driving a lot of the gain lately. And they tend to be inflationary areas. Your energy has done very well, other hard asset types of course, one of the greatest beneficiaries of any inflation are the very people who create it, your banking system in the United States is directly responsible for inflating the daylights out of the dollar, thank you Federal Reserve for putting that little cartel together. If you want to learn more about that go listen to our interview last week again with G. Edward Griffin. But enough beating around the bush here. Let's get on to our interview with Doug Wakefield because we carry on a lot of conversation about all sorts of good things and I don't want to trample on any toes of things that we talked about in that interview, so without further adieu, let's get right on into the interview with Doug. Of course we have to make sure that we have the volume for the interview with Doug properly set up...and let me get that straightened up here for you all right now. Okay, interview with Doug, commence now...

Alright everybody. We now have our guest Doug Wakefield on the line. Doug thanks for joining us again.

Doug: Thank you Johannes.

You know, a couple, boy it's probably been about two months ago you and I talked and covered a ton of ground on all sorts of different things. And the subject that we had as our main topic is why things are different this time around and of course that's the theme at Vigilant Investor, that's one of the things that you talk a lot about at Best Minds, at your web site through your various publications and so forth. But in advance listeners Doug and I basically have talked, and we thought it might make sense to hit a couple of current events a little more and focus a little more specifically on issues and probably the biggest one there Doug is obviously yesterday's big election and everything that came through with respect to the shift in power from the Republicans to the Democrats and the House of Representatives, we're going to have Nancy Pelosi as the new Speaker of the House and it seems like a lot of people are at least on the victorious side suggesting that boy things are going to be a lot different, I think a lot of people on the sidelines will just sort of say hey, this is a new party maybe it's not [...] think a lot of people probably voted Democrat simply because they didn't like what the Republicans were doing, not necessarily as an endorsement of the Democrats, but as a rejection. But, you know, boy, immediately you start hearing the trumpeting of you know this is a referendum on the following issues that kind of stuff and any thoughts on the context on what that means to investors and so forth out there?

Doug: Well I think the first thing, and we talked about this some, but I mean you go out and look at the fact that Nancy Pelosi is the first woman Speaker of the House ever in history so you've got an historical juncture that's happening, the Democrats clearly have taken control of the House now and at least from my latest information still pending on Senate. But still, like you said, a massive shift, is this a massive shift and one of the things that affects our financial markets and it is government spending. Have we seen now a change in attitude? And at least from a couple of preliminary ideas, it would not appear so. And so why don't we just kind of touch on those for a second.

Yeah, a couple of things that I heard Nancy Pelosi mentioning as part of her speech related to now we're in charge, you know that general hubbub last evening and then again this morning making the news wires, one of the big issues was the minimum wage and it was almost a referendumish kind of talk where this was a referendum, obviously people want the minimum wage. Of course that was supported by voters in 5 states giving an okay to some propositions on the ballot that I think it was Ohio, Arizona, Missouri, Montana and Colorado all okayed minimum wage hikes. And you know really on the surface, you know everybody thinks that you know, let's help the little guy it doesn't really matter to me and how could that possibly apply and besides which, boy the mentality in especially when it comes to personal finance among a lot of people is, you know in the buy and hold environment, it really doesn't matter anyway what the heck happens on the surface level, but what about a minimum wage increase? What is that translate into relative to the U.S. position competitively on a global scale, and Doug don't people realize that when you raise a minimum wage you make floor labor that much more attractive and you make the utilization of technology as a replacement to labor that much more attractive? I mean, I just don't see where the justification comes in and yet it appeals to the masses on one level and people just, do they just not care?

Doug: Well, I think what you just said, appeals to the masses, and you know it sounds as though you're being elitist as though you're not one of them, well we're all part of this mass. And that's where we have to, I think, ask ourselves, am I really being swept along because somebody is telling me something that I like? And government in the United States has become to such an enormous size, I mean it was 12 percent of the income generated in this country in the 1930's went to government, it is now close to 50 percent, we've had a [...] and this is not something that has happened in the last quarter, last day's market news this has taken decades to arrive at this juncture. So because this is so deeply embedded in our psyche, if I vote for this person they will provide these benefits from the government. If I vote for this person, they will provide a new set of benefits. So I think that the first thing you need to ask an investor is, can you keep doing that and just rotating the ball and somehow the government magically just creates more money from different buckets to paper stuff? In the minimum wage's case, if the government dictates a policy, clearly the government is having a major influence on your private sector. If they say okay we're going to now raise it you're going to have to pay these expenses, then it does have a real impact to your bottom [...] The second one, you know, you'd mentioned earlier of course is about the proposal of making college loans more accessible to students. Well, I'd read here recently in a publication that the average college student by the time they leave college has over 20 thousand dollars in credit card debt. So most of our students today going through colleges are not able to go through college unless they take on tens of thousands of dollars worth of debt, which of course has an impact on your economy when they come out and how much money they can afford to spend on other things verses paying off that debt. So, is making more debt available through the government something that is long term healthy for the economy?

I think it also needs to be viewed through the lens of the credit system and what that really translates into and I think that a lot of people think, oh isn't that great that the government makes these loans available, and these are sub market loans, the rates that you get for going to college are [...] on 2.5, 3 percent, you're really not going to find any rates like that out there in the private sector. We're they not being really generated by the U.S. government, backing it one way or the other and moreover well, even on the front as money is coming through the system people need to realize that money coming through the credit system isn't necessarily somebody else's savings. Doug, a lot of that is coming out of the fractionally minted money supply, it's through the banking system, fractional reserve banking system where literally money is being created out of thin air. So, a lot of people are always asking me, they sit down and they want to do some planning for college, their jaw just drops when they see the percentages that college keeps going up cost wise and I say to them, well there's a reason why college went up 14 percent last year it's because it can, because so much money is being minted out of thin air, that it's being driven, and people don't understand that inflation is not just something, you know they hear CPI is at 3.5 percent, it does not go evenly across all asset classes, it does not hit automobiles, TV's everything the same way. It floods to assets that are higher in demand, first order thing, and college education is pretty high up there among most parents and most kids, and when you have that kind of a demand there and that money is available, well sure it's going to go up a lot higher. And you know, I've sat down with parents who literally have told me in the past, you know, we will do anything it takes to put our kids through college, they'll yank out all of their home equity, we know that home equity loans have been as cheap as ever over the past couple of years as well. And these people will hock themselves up to the hilt just so their kids can go to college. I've even had a few people tell me they'd be willing to declare bankruptcy after their kids are out of college, just so their kids can get though school, and they [...] to pay. And you think about what that's doing is it's driving the prices up and it creates an inflationary environment. Anything related to college and education on that front is going to have, become more and more dependent on that easy money and it causes dislocations. It's just not healthy.

Doug: Yeah, I want to touch on something that you just mentioned there, which I think is very profound. You said, that you've had somebody tell you, hey listen if I had to file bankruptcy after I got the kids through college, I'd do so just to get them through college. I had a gentleman, this was probably two and a half years ago and someone up in the Boston area I believe it was, contacted me and said, "listen, we know what you're trying to do and stuff, and I've got a guy up here that I think you'd be interested in talking with," I said, "oh, okay fine," you know we're always picking up ideas. The gentleman called me and he talked, and after we talked for a while it was very clear our ethical views were vastly different. But here was the statement, "hey listen I'm doing sort of the same thing you are. I'm telling people that you know there's all this credit through the system and it's wrong." And I said, "okay," so far so good, "what are you doing about that?" He says, "well, I'm doing seminars where I'm telling people go out and file for as many credit cards as you can and just run them up as high as possible and then walk away from it, screw the banks." Then I was like, "ah, I'm not sure we're on the same [...] here," but his thing was that ethically now this was okay to do. These guys have done wrong to me, so I'm just going to do public seminars to tell people to go massively in to debt and walk away from it.

It could be done and I think it reflects largely on where we have arrived over the last 100 years where the more hand are in the till, and I think there really is a public sentiment in a lot of ways and, of not really having any control over your ultimate, you know, where you end up. And there's a definite feeling that people are getting the screws put to them by the big guy, by the man, and that could be big corporations and so forth and you know partially they're right on some levels. And you know you look at some of these mass litigation cases that come through and people see that you know it's perfectly legal as long as it's legal, it might not be ethical or moral but if its legal to help someone get a hundred million dollar lawsuit for basically their own negligence, and they can win for just being reckless and careless, but because a sign wasn't posted in the right place you know, frivolous lawsuit kind of thing, well I may as well get my, through my hat in the ring and get my take at the same time. Things start breaking down on that level, it's really dysfunctional on some levels, but there's really almost a sense of you say hopelessness in some ways in that people are willing to do that and that's, you know, desperation? Or what would you call it Doug?

Doug: I think what you've said about, it really does come back once again to the political system. If I feel like I'm not getting my fair share of the economic pie then one of the strongest voices I have because I'm in a republic form of government is that I'll vote in somebody who'll help me to get my fair share. And so rather than having the view of, you know I am responsible for my own life, there are events that are beyond my control, but there are also events that are within my control. Now I've become much more militant and I [...] that if I can elect the right person in there who espouses my view, I'll get my fair share. Well, the danger of course that we both know is then that person whoever is elected is probably not really espousing my views. I'll give you an example, one that really hit me when Ben and I were talking this morning, is I said, "okay, so there's been a huge change in our country of Democrats verses Republican control in the house and now possibly the senate. But this is a bigger change because it's been 12 years since the Republicans have controlled the House. So, if that's the case, what can we look at the track record to see some major voice in the democratic party who has quote "worked for the con man" verses some Republican?[...] that's work for quote "the common man." Let's start and I'll take Joseph Liberman. Well, Joseph Liberman, a huge high profile name, I believe from the state of Connecticut. But, in the 19, mid 1990's according to bull, the history of the boom and just the public record, Arthur Levitt even talks about dealing with him, his book that we have on our web site, Taking on the Street, we have several book reviews, and that's one that I'd strongly recommend because now you've got a former SEC Chairman talking about people he dealt with in Washington, and he basically says the same thing that [...] talks about in her book, is that here you have someone who came in and would not vote at all was extremely antagonistic about making stock options as an expense. Well if you look at the people who come in with huge, millions of dollars worth of stock options, Joseph Liberman was basically saying, those who are making, you know, very high amounts of money, as your CEO's making hundreds of millions of dollars, well I'm being backed by them and so that's the group that I'm endorsing. Now I'll turn around and tell you that I'm for the small guy, but look at the laws that I supported, the record speaks for itself. I was not supporting the little investor, I was supporting the guy who walked out the door with like Al Dunlap with a hundred million dollars of stock options when he walked out of Scott Paper. And on then on the other side just briefly, I can't help but look at the markets in the last few months and just [...] hey we have a strong economy, and it pretty much doesn't matter who it was in the Republican leadership but seeing hey we got a strong economy, we got a strong economy. How can you pick up the news and go, housing [...] down further, GM in the month of June and July seeing that 22 followed by 25 percent decline in auto sales I'm mean those are not strong economy. Common sense tells you that's not right. So, you know, it's such a shame that you're almost using certain terms solely for the purpose of getting elected I think. And that is very sobering.

Yeah, and just wrapping up the subject of the elections and government, it seems that regardless of which party is in charge, you really have a fight every election over who is going to be controlling and doling out to which subset, to which special interest group, which, you know demographic that is, that supports that particular party. And, I think that, you know, at what point, I think people really ought to be asking is at what point do these free lunches, I mean you just can't keep paying things, I mean look at the federal deficit, the trade, or excuse me, the federal debt as well, we're at you know what, 8.5 trillion dollars worth of debt, the deficit this year, well understated but probably close to 300 billion this year and you know, who knows where that's going to keep going. I think 3.5 trillion, 2005, when you add it all up net present value, it's going to come due eventually and I think as investors people need to ask the question, how are we going to pay for that if we keep piling on more and more, when you shift from one party to another, and you know the big gripe on the Republicans is that they're just running rough shot with the war, and yet the Democrats are going to do the same thing. Now you mentioned Doug about GM and housing [...] that, what did you see happening there?

Doug: I was looking at some stuff today on General Motors and I found, you know General Motors is such a story of Americana, I mean, you know we've heard before so goes General Motors, so goes the rest of the country. In fact I'm thinking in a famous movie with oh gosh, it's name was Rear Window and it was a -

Alfred Hitchcock.

Doug: Alfred Hitchcock, yes, thank you. And anyway, when that movie came out I believe was in the 50's, you have, you know the woman was working, now tell me who was the actor, my mind goes blank...

Cary Grant, was it not?

Doug: It was not Cary Grant, Jimmy Stewart, and Jimmy Stewart. There we go, Jimmy Stewart and Grace Kelly. And Jimmy Stewart is sitting there and he's got his leg all broken up and I can't remember the woman who comes in every day and she's doing physical therapy on him. And she's done physical therapy on all these very famous people. And so she comes in and she says, "well I remember '29," and he says, "oh yeah, I guess you know what's going on," and she says, "yep, yep I know what's going on, because I was working on General Motors, I was working on the CEO back in '29 and he was really upset," and he says, "so what's that got to do with anything?" And she says, "when General Motors has a hard time going to the bathroom, I knew something is going to happen to our country." And he goes, "oh yeah, right, right," he said, "remember the '29 crash, remember?" And I think that General Motors is such an Americana part of our literature. Here is the largest automobile manufacturer in the United States and possibly even in the world still today. So when you watch a stock that has declined from 45 in April of 2004 to 27 in April 2005, 18 in April of 2006, if you were just looking at the headlines coming out that I just mentioned you know, 22 percent decline in sales in June, 25 percent in July, and you would say my gosh, I don't think I'm going to put any money over here. But what most people don't even realize is that because of a vast majority of money, mutual funds, even today are in indexed, they're buying shares of General Motors every day in their retirement plan and they have no clue that it's even happening.

It's true and you know it's amazing in that, and I think GM, it hasn't passed where GM is still not a bellwether to the U.S. on the corporate level, but you look at the problems that GM has run into, they're not to dissimilar from what the Federal Government has done, I mean it's a reflection of the people largely voting for these things happening but promising way too many benefits, promises that it can never deliver, expecting the sun to shine for ever and ever and ever and never run into problems and they never run into competition and to think that you can keep piling on more and more and more benefits and not manage in a way that really is looking forward but kind of just in a, almost stuck in time and you look at where GM is now, they're jettisoning all sorts of employees, they're cutting back they're facing massive tension shortfalls and not just that the bigger shortfalls are the healthcare liabilities that they have building, and building and building, you know, wow, that sounds like a story right across, you know, a few miles to the east in Washington, D.C. where these liabilities are massive and you look at the federal deficit, you remove the liabilities and that present value liabilities is of things like Medicare, Medicaid and Social Security, you go from a difference of 680 billion dollars using general accepted accounting principles for the deficit in 2005, and when you build in those benefits, those promises you're up at 3.5 trillion and that's just insurmountable, and if it's insurmountable for GM, I just don't see how people can make that connection, but it's you know, where is this price of GM going up in the face of all these hassles. Where are the sales, I was reading Toyota is having you know record-breaking years and quarters and all that but, where's GM's sales?

Doug: Let me point out something that I think is also interesting in light of what you just said, is that I think there's two things that mentally, and people need to stop and ask themselves, do I think this? But I honestly have seen it happen in discussions, so I know there are people who do think this way. And you have to stop yourself if you are espousing this. But first is, you go well, what Doug, has happened with General Motors stock since April of 2006 when it hit 18, well it closed yesterday at 34.62, ah ha, see Doug, you don't know everything that's going on, there must be a lot of great things going on at General Motors because it's now gone up almost 100 percent in 7 months. So I'm going back to work, shut up and get off the phone. Well, first of all is, but why did it go up? And I espouse part of that reason is exactly what you're talking about with the amount of liquidity, we know that this year there is over 550 billion dollars in the first 10 months expanded into the money supply if you look at M3 as a way of measuring that. Well, my Lord, if you had 550 billion dollars blow into your system of new money, it's bound do create new loans for colleges, money going into the market, people borrowing in hedge funds, I mean a variety of things that are going to change price, that's really not people buying value, it's just you got to do something with that extra debt cash that's floating through your system. The other thing I thought was interesting is your comment about General Motors about two years ago I had a gentleman, and I was discussing with a group of guys about Delta Airlines, and Delta at the time was of course right on the verge of bankruptcy and the airlines industry was just looking atrocious. And so he says, "well, I'll tell you one thing, as bad off as it is Delta is too big a player for an airlines industry for the government to let it go under." And what they do is they take then the story of like Chrysler who, you know, got out of bankruptcy because the government intervened. The Savings and Loan back in the late 80's, they got out because the government intervened, so we saved the, you know Savings and Loan, even though it's you know, you're going to have people go under. But you see that the government has somehow with this magic wand that I don't understand, keeps intervening and hobbling things along. So, if I see General Motors, there's probably people out today going, well know matter what General Motors do, they are so crucial to our national economy, that by golly somebody in the government will step in and bail them out.

That's a terrible precedent, is really what it does is, if you had the long term capital management hedge fund in the late 90's which was a different kind of a bail out but you know, here you have the average investor plopping in there what, 15 million dollars in to that thing and it's a billion dollar hedge fund that ends up leveraging itself up to well over a hundred million dollars and that thing starts falling apart and dragging the, potentially you know, Wall Street down with it is what we're told, and of course the Fed steps in and organizes somewhat of a bail out all of these other banks come together and really now even though the situation now where people will say, well they did that with long term capital management, why won't the do it with the next one? And they did it with Chrysler, why not GM? They did it with this event or that event and where does that money come from Doug, for bailouts?

Doug: Well, you know and that's the thing that I think we have the hardest time if we step back and look at history is that, you know we don't realize that the way that an economy moves forward in history is in many cases an experiment, it is not an absolute, it's not like gravity, men are experimenting with money. And so we over time since it kind of keeps going along we assume, well it's always been that way. That's not the case at all. And as we both know, in 1971 when Nixon basically said, "okay, we've run up our debt, we've got Vietnam, we've got Social Security, Medicare has just come on line, we've got a huge amount of growing debts here and we can't pay for it all by giving you gold for our dollars, France, Britain, other countries. So, I'll tell you what we're going to do, we're going to come off of the gold standard, meaning if we run up our debts, we have no obligation to give you this real money for our paper money." So, what does that mean? Well, that means as of 1971, all the countries of the world for the first time in world history said, "I'll pay my debt with your debt and vise versa, so we'll exchange paper for paper for paper for paper." Well what do I do if I run up more and I print up more money than the U.S.? If they stick it in the banks in China, China's got to loan out more money. If they stick it in the banks in Japan, Japan's got to loan out more money, whether it's to the government or to the private sector. So everybody has to play this inflation illusion game together. The trouble is then what you've done is you've created a psyche change in your culture to, well I guess we can always do that. Which ultimately leads you to more crisises occurring and it's just galling to think that you have people in leadership going, well we really don't know why the bubble burst or why the bubble is there. Of course you know why it's there, it's because you had too much credit bumping against each other and every time you had a problem, you just printed more debt to pay yesterday, pay off yesterday's debt.

Right, I think it's important also that listeners understand that prior to Nixon taking us off the gold standard, what you actually had happening was literally a run on the bank almost by other central banks finally saying you know, you guys have been going kind of crazy with all this expanding of your money supply, you're paying off your bills with freshly minted currency for Vietnam and for all these social programs under Johnson. Again, there's no free lunch and yet we kind of, you know are led to believe that we can just, you know the sky is the limit relative to what we can give away and if we just were nice enough and pleasant enough we could solve all the world's problems. That costs money and it's got to come from somewhere and if you take it out of the economy, it's going to crush the economy so they tried to print it. And it's a different way of doing it, it's more surreptitious obviously. But, back to the point, these foreign central banks were stepping up to the gold exchange window and they were turning their dollars in for gold, and it was a run on the bank and Nixon had to close the bank is functionally what he did and of course it was tidied up nicely to be said as oh we are just are shifting the monetary system, won't it be all great and dandy but functionally it was a default.

Doug: Correct.

The other point I think most people miss is just the nature of inflation. We talked a little bit about it earlier and that it doesn't go evenly across all asset classes. I think that also sometimes people don't that see these things move glacially. And, you know if you put your hand in a boiling pot of water, you know it's hot pretty darn quickly. But, as it's gradually heating up with the old saying is you could boil a frog alive if you heat it up slowly enough he's not going to jump out, you know. There's that analogy to human nature, if things move slowly enough, you get accustomed to that and before you know it, you know as my brother always says, you know if you have a sore throat long enough, if it comes on gradually enough, you could be pretty sick and you won't even care.

Doug: Correct.

The, what people don't realize is a lot of this has been going on over the last 20 years and they also don't realize that a lot of the inflation that would have been stuck here in the United States was vented off abroad via the trade deficit. And were it not for the trade deficit venting into China, and coming back actually ironically back in the form of hyper cheap big screen TVs and home theatres and so forth, if you had closed borders, and again that's one of the other things that the Nancy Pelosis of the world are talking about is putting in trade restriction you know, maybe that'll help GM they think, or something along those lines and help the average worker. But, really what you're doing is you're forcing that inflation to be stuck in the United States. And you want to see things go from, you know trickling downward to bad really fast. I think that's something that people need to be asking. Do you really want to have that happen? I mean there's a reason why consumers are choosing to buy from China. It's not just because they like Chinese made over the U.S., it's primarily because that's what fits in their budget, period.

Doug: Let me interject this, because I know we're getting close to our time, but I think one of the things that, and we talked about this some on the phone, and one of the gentlemen I read, Os Guinness, just a profound philosopher, has looked at it and said, "when societies move more and more apart, they become more and more militant and rather than listening, they just go, hey I'm one of them, so we're right and you're wrong." And that being the case, there is going to be something that triggers this domino, and will finally start bringing down. And even like you're talking about, the gold standard, it's that week in August 1971, Nixon closed the window, London came through, England came through, pulled out 3 billion dollars on Monday, one week later France couldn't do it. So, what we don't realize is that there is no way of telling who is the variable that will start it. It's not a Republican thing, it's not a Democratic thing, and the easiest thing is when it starts is for us to have a witch-hunt. Let's find out who was the one, you know, person behind...The process of course of creating fiat currency is illusionary and I think we're going to have some very sad days for the Federal Reserve when people really understand that part of the process. However, it's going to be critical politically that we realize hey, if we're going to work ourselves out a solution here, we're going to have to all admit that there were problems in the system. It wasn't a party necessarily that did it, we collectively as both parties just said, we're going to endorse giving you what you want, we'll create money out of thin air when needed to be, it certainly is not the rich taking for the poor, or the poor needing higher minimum wage, it is Federal Reserve, when we have a problem y'all print more money, and whoever is in power will quote "look better by giving certain things to their particular constituents."

It's missing I think from a lot of people's perspective, you pick up any investment magazine, and investment newspaper, and the conventional standard protocol is buy and hold, don't worry it all works out in the end. And I think where people really need to start asking some questions is you know, is that appropriate for all environments, especially if you start scratching beneath the surface and start discovering the points that we're bringing up, Doug. And I think that what a lot of people don't realize is that, you know you often times use the term, you know it's a high stakes game, high stakes casino. And I think that describes a lot of what's going on and I think that any time you go into a casino, obviously you should know, at least the most successful people who are gambling know that the odds aren't necessarily in their favor. They go in there knowing what the odds are from game to game, and you just don't go in there blindly sort of assuming that it always works out in the end. And maybe the analogy isn't perfect but people need to understand that there are some pretty savvy players out there monitoring what's going on, and if you're just part of the buy and hold subset that just is on auto pilot with that money, you're going into your paycheck every month, go into your 401K on auto pilot, and you haven't reviewed your asset allocation, and even then you don't care really what it amounts to, and you're just kind of sticking with the static stuff that's worked from, you know over the last 10 years, oh maybe it came down a little bit in 2000, but look, it's you know, the Dow's hit new highs, you know, why worry. Yeah, you really ought to be asking some good questions.

Doug: Now, there's one thing that I think will be, go down in the history books as a phrase that will not be used, I don't know, 10, 15 years from now, and it will be, just get to the bottom line. Because by doing so, we no longer think, as long as we made money, we just assume we must be doing the right thing. We don't know how it happened, but as long as the bottom line is looking good, we don't really look much passed the front of the hood of the car.

You really need to find out what you're putting in the engine and everything beneath the hood a little more than what I think people, and again that analogy is not, the car is one thing but your finances, it's business. It is you know you really ought to have a better understanding. And I think anybody who runs a business knows, at least they should know, you just don't go blindly into you know any old place to start up your business without any research, without any thinking and just assume that you know, on average, it's going to work out. And yet, that's exactly what people do when they really are managing their own wealth and that's really what it is, people think, oh I'm just investing and you know the system is going to take care of it all for me but, boy if you're on auto pilot, you're on auto pilot.

Doug: Hey, listen to this, kind of, one thing I would like to ask you to comment on as well, and I'll throw out mine. If you were to look at the financial markets in the last 12 months, what is one rule or one change that has occurred in this system that you think will have a profound impact on investors?

What is one rule that has changed in the system?

Doug: One rule, one part of the game that's changed, that you think investors really don't understand that is going to have a major impact.

I would say it's got to be the dollar. And I think that dollar has carried along, and what I mean by the dollar is the dollar's strength has carried on very well based on the environment that it was in over the last 20, 25 years declining interest rate environment, inflation able to event abroad and not really show up on our shores. It's going to be hitting up to the level, largely because of debt, Doug, and I think that the debt level, you just can't go on indefinitely piling up debt. You just can't do it day in and day out and be indifferent about it. And I think what people are going to be surprised about is that they, you may see your value of stocks going up, you may see value of different things going up, your investments, but relative to what should be the question people need to be asking. And I think that's really, you know, real returns verses nominal returns. It's not just verses CPI, everybody says, oh I got an 8 percent return and I subtract 3.5 percent CPI off and that's my real rate of return. Well, that's all nice but, you know people talk about the Dow Jones Industrial hitting these new highs, well leaving out CPI it's not a new high, and adjusted it should be around 13, 8, 13, 800 to be a new high but if you adjust it again for something like gold or against oil, you're at about half the price. You've lost half of the purchasing power on the Dow.

Doug: Yeah, I think what you just said is very key for investors are, hopefully even have advisors listening to this so that they don't lose their business because when this cracks, what you will have are people who come to realize, you know I've been so busy and I've just assumed that these platitudes that are used even throughout the financial industry are just true. They're absolutes, just like gravity. So, I do not know what I'm really invested in, the advisor I have said, "hey, look you're up over the last few months," what more should I be doing? And the sad reality is, I think probably one of the ones that hits real home is this huge hedge fund, Amaranth that literally was up 25 percent at the end of August. The person getting their statement if they didn't know what they were investing in, and don't know what they're doing says, "hey, these guys must be pretty smart." And then three weeks later, they're down 35 percent. So, going from up 25 year to date to down 35 percent closing up, I mean you just have massive havoc occurs literally in a 3-week period of time. And this just happened in September to a group of investors. So, it is going, when we get there I think the thing that you, I would want every investor to ask themselves today, do I have an exit strategy? Do I even have an exit strategy or am I just assuming that it really can't possibly go down.

I think that people also ought to be asking and, I think a lot of people are under the assumption that you know, well if, you know, these two guys that we're listening to right now are talking about it, and they're in the business themselves, obviously my guys must be talking about this, maybe they're just not telling me. But, you need to be asking your advisors, you know, what about the dollar? What about inflation, what do you see happening relative to a lot of the things we talked about today and the opinions on these sorts of things. And if you're finding that they're not talking about it then, you really ought to be re-thinking your outlook on, and how you go about stuff. Because these are important conversations, not to say that Doug, you or I have all the answers but, I mean, you know I don't know about you, and one of the things I like about you Doug is that you're always looking under every stone you can find to see if there's more information that's just not being looked at. And you know people often paint folks like us as being contrarian, and I say that's not really I think, accurate. What we are is people who just don't get comfortable with the status quo, because we've seen in history that things like this don't go forever and moreover, the fundamentals when you really start looking at what a lot of people are ignoring, they tell a compelling story there.

Doug: Absolutely. Have a curious mind.

You have to, and I think that investors, you know for the last 20 years have been able to get away from not having as curious a mind as they ought to, but I always remember that when I got in this business my dad always told me, he'd been in the business before hand, he said, "don't forget, when I got in this business," which for him was in 1974, "stocks and mutual funds were a four letter word, don't ever forget it." But we should probably wrap up on that note Doug, because we've gone about close to 40 minutes here and great, great discussion. And look forward to having you on again in the not to distant future and maybe you can tell people about where they can get in touch with you and some of the things that you've been up to lately at Best Minds.

Doug: Very good. Just real briefly, for those interested, we have the name of the company is Best Minds Inc. if you just typed in a Google search, Doug Wakefield Best Minds Inc. or even Best Minds you'll probably see us pop up [...] close to those search engines, top of the search engines you'll see public articles we've written, but bestmindsinc.com we offer a free service where once a month we post 4 or 5 major issues type of either news events or research papers. We also collect document from a variety or sources and make comments on those. That's [...] for those interested in much more detail, our view is really taking a macro issue every month. It may be ethics, it may be the markets, it may be the Feds, and looking at it to really try to get you not to come up with, hey this is the perfect investment, or this is the strategy. We don't manage the money. But this newsletter is really focused on, can I change your thinking? Can I get you to look at historically where we've come from, so you're not just grabbing the news at the last minute and going, oh, that's all that's important. But, just like we talked about today, being able to listen to Johannes and say, hey well he made this comment on something that happened in 1971 and that's critical of what's going on now. He has a grasp of history. Every person that will read, we want them to expand and ask more questions so that they become more curious and hopefully it will greatly increase their probability of success with what I consider a very dangerous market in front of us.

Those are great points Doug, and it's almost the analogy sometimes is, you know you often hear you don't see the forest from the trees and boy, you can flip on the Kramers of the world and get the hot stock tips and whether these earnings are going to be supported and so forth. And, really get down to that little microcosm level. We've missed the big picture entirely just by not having a full grasp and you know, like we were saying, you can get away with it and you got away with it of the better part of the 82 to 2000, 2000 wasn't an accident and a lot of people really haven't woken up that it just you know, it just kind of happens, it's what is supposed to happen, we really have to pay more attention. Well hey, Doug thank you so much for being on again and we'll be in touch with you soon and if listeners want to get in touch with you they can, can they equity-mail you there as well?

Doug: Correct, correct. If you just go to the web site bestmindsinc.com, all of our contact information is there.

Excellent, well thanks so much Doug. We'll talk to you soon.

Doug: Alright, thank you Johannes.

Good stuff of course, well phone lines are, excuse me, now open, and anybody who wants to call on in and engage us in the conversation, review what we talked about there with Doug. Just interesting things there, the number you can call (724) 444 - 7444 when you call on in the talkcast id. is 982 and hopefully you've registered with Talk Shoe if you have not, you can use the pin number 222-333-4444 and that will get you on through at least this time and in the future be my guest to get your own. But, you can use that again if you need to. But, hey register with Talk Shoe and you can also be part of the chat environment as well. But, Stephan I see you're out there, co-host, occasionally you drop on in here and here you are today. Are you available? I see he's out there but evidently not immediately tuned in. But, you know a couple of good points that I thought Doug had made, one is relative to the, what we talked about Federal Reserve and Doug made a point regarding the Fed getting fingered for being complicit, and basically what's going on relative to the markets, or the credit bubble I should say, all the money supply and flooding with liquidity. And I just, back of my mind wonders whether or not that will actually come out. Because if we look at history, we know that the Great Depression happened, few people monitor that the way that we do. Austrian school of economics has a tendency to look at things a lot differently and prior to Keynes really dominating, the Keynes school of economics dominating thought and pushing out what was then more a free market approach was the Austrian school. People were very skeptical of creating these, just monkeying with interest rates, monkeying with money supply because they were fearing that it would start business cycles and exasperate business cycles and so forth. But back to the point the Federal Reserve being, getting itself in trouble and losing credibility with the people, I wonder if they really will because, they should have lost credibility back then for being complicit in creating the bubble environment that was the 1920's. And people think you know, boy bubbles they're a fairly recent phenomenon, the stock bubble of the late 90's dot.coms and all that kind of stuff, housing bubble today, recent phenomenons, right? No, if you go back 1920's, the go go 20's were all about excess money supply flooding around the market, the economy, and people operating it as if that was real wealth, real growth in the economy. When in reality all it was, was fictional activity. Granted, it created activity but it was no sustainable. You don't create sustainable activity by counterfeiting in your basement and neither does the Fed create sustainable activity in the long run by doing functionally what is the equivalent of counterfeiting just because it happens to be in New York and Manhattan that comes out of the official Fed speech from Ben Bernanke, doesn't mean that it's not necessarily corrosive and I think an important point that Doug made is that these guys that are running the show, from the U.S. Treasury to the people in Congress all the way over to the Federal Reserve, they're kind of charting their own course as they go along. There is no rulebook that says this is exactly what's going to happen. And I think people need to have an open mind relative to being skeptical as to what they're doing and I hope people do question when this credit bubble does unwind what they have done to create it. Ben Bernanke just this past week, I think is was on Friday, gave a speech in New York, and here he was talking again about how we don't want to repeat the mistakes that we made in 1929 when the equity market burst and the Federal Reserve then did not act fast enough to flood the economy with more liquidity. And that's one of those misunderstandings that people do not understand that back then, the federal, of course you have to study this sort of thing but, back then they don't understand a lot of liquidity was injected into the markets. And the belief really is that it wasn't done fast enough. But I'll tell you what, from 1929, 1930 through 1933 the Federal Reserve was pretty active in injecting more liquidity. And what probably would have been a fairly concise albeit very deep recession would have been over a lot faster, would have opened fairly quickly within a couple of years, typically when you get into those kinds of corrections historically they wrap up pretty quickly. The problem is the Federal Reserve and then FDR started to pile on by taking more and more money out of circulation from the private sector and plowing it into you know, boy, FDR and all these great work projects that he was doing. He was putting people to work but he was putting people to work doing things that the economy didn't need. He was yanking it out of the functioning economy and the part of the economy that was trying to recover, he was injecting it into areas where the demand was simply not there naturally. Moreover, a lot of it was financed out of thin air thanks to the Federal Reserve and all they did was create less and less stability, more corrosiveness, because when you're printing money out of thin air it's coming out of the savers, the responsible the stewards, the people who know what they're doing, the entrepreneurs, and you're sending them bad signals as well so they don't know where to go, they lose confidence and we're running into that again. But, we're getting close to being out of time tonight. Any comments from anybody out there, Wally I see you're with us tonight, you had some good chat messages, comments through the show and not a big fan of the 90's bust I see there, no doubt that was a problem. The -

Stephan: Johannes, Johannes...

Hey Stephan, you're there, okay...

Stephan: Yeah, I'm here, yeah. Just to sort of finalize what you're saying, to pull it into perspective. I think it is worthy of the topic of a show maybe [...] talking about the expanding of the money supply and Doug is a great, fantastic analyst and he makes some awesome points, but, basically the expanding of the money supply [...] already and you know the buy and hold strategy that is one of the greatest [...] in history. What we always talk about with our clients, talk about with everybody we know, write about on the web site. But, maybe to close on this point and leave the topic for next show, the fact that the Dow peaked at around 11,700 in January or 2000. Now today we're told that we keep breaking new records, we're at 12, you know we're at 12, 250 etc... but I think what we want to, what we want to point out is that, you know, adjusted for inflation, the Dow is currently at 10,459, okay? Nominally, you're at 12,250, but adjusted for inflation, the Fed's figures which are pretty darn conservative, the Dow in "2000" dollars is at 10,459. The problem there is that is 1,241 points [...] the 2000 peak of 11, 700. So while you're nominally at 12, 250 in the Dow, you're really at 10,459 compared to the 11, 700 high of early '00. You're down 10 percent and I say that's akin to you know rigging your scales to read 10 pounds lighter when you step on it to make you feel like you're not so fat, or to go to the gym and painting a bigger number on the weights that you lift to make you feel stronger. But, that's the greatest swindle going on out there and I think that, you know you can take it to the Fed you can take it to the government, you could take it to our industry, it's sad to say the investment, the financial services industry to a great degree, the dirty little secret is that it's a sales industry. And you've got a nation of 401K participants saying hey, the stock market's going up, they're totally blowing off the inflation factor.

Yeah, the other point that Doug made, has made repeatedly when I've talked with him off air, is that, you know, and we alluded to it during our conversation is that it really is a financial markets need to be viewed more skeptically by participants as the casino environment. And the casino, you know, you know when you show up, anybody who has ever flown into Las Vegas, one of the first things that should strike you is, hey they can afford to put pyramids and all these crazy things, scale models of New York City and etc... etc... etc... clearly people are not giving away more money than they are earning and people are going away poor obviously that they can afford to do that kind of stuff. And the casino analogy I think makes a lot of sense. You have to understand that you are playing by different rules and I think that you know, if you look at a lot of the rules going on out there in the economy generally speaking off of Wall Street, how many of them are prohibitive to you starting your own business? All the lawsuit environment out there, you'll get the amount of regulations you have to contend with if you want to start your own business, you got to hire a fleet of attorneys and a fleet of CPA's, tax consultants, all these different things just to get out of the box to start a fairly, you know basic business, so complex compared to how it used to be, because of regulation, regulation and all these barriers to entry. And it really benefits number one, the big players of course who already have the critical mass, but also what it does is it creates an environment where people are left with a, you know, the question you know, should I do this on my own or would I just be better off putting my money into Wall Street? And I think that boy, one of the things that changes a lot is you know why work your butt off left and right if you can just you know make 10, 12 percent a year just by sitting on your butt and doing nothing. It's kind of like what happened in the late 1990's with the dot.coms where you had a lot of day trading going on and people trading in their underwear from the kitchen, thinking they never had to work another day of the week, because, day of the week, day of the year, day of their lives just because they were able to make all these great returns for really virtually doing nothing. And I think that when you get that kind of mentality or in that kind of environment where it's just forgo option A which is just going out there and earning money the old fashioned way and instead go a different way. And then to boot doing it in an environment that really is the casino run by Wall Street you better start watching yourself and being careful. But, we're at an hour and four at this point, and I don't want to run much longer because then we start getting prohibitive relative to what we can do, people downloading and so forth and length of show. But tune in next week, we're going to have a little bit of a different, well different day entirely for starters. We're going to have our show Tuesday night, 9PM instead of Wednesday, so mark your calendar for that. And be sure to tune in, tell your friends and make sure we get some callers next time, you can call in on our live number there. And next we are going to have a guest, it's going to be Robert Bloomen, he is heavily involved with the Mises Institute on some levels, he knows his Austrian economics pretty well. And we're just going to discuss some of the things going on relative to the economy right now, credit bubbles, blend of the Federal Reserve a little bit and engage in a live conversation, so anybody who wants to hop on in and participate as well, unlike a pretty-recorded interview, which is always nice. So, be sure to tune in and without further adieu, this is Johannes Ernharth, my co-host Stephan Ernharth there briefly and this is Vigilant Investor live every Wednesday night ordinarily 9PM, tune on in, and take care until next week.

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