Jim Puplava: Oil Is the New Federal Funds Rate

Jim Puplava has made a decades-long career of interviewing hundreds of notable experts on the economy, energy, precious metals, geopolitics, agriculture, and other sectors that impact our future. 

The outlook he has developed as a result of all this input is less than sanguine. Jim concludes that economic growth will be constrained both by world governments' chronic addiction to spending more revenue than they take in and by the systemically rising costs of fossil-fuel-driven energy.

In terms of growth, he sees political leadership becoming less and less relevant in its ability to effect outcomes. In fact, he declares the price of oil as now being more influential in stimulating or depressing sovereign economies than central bank interest rates. In his words, "Oil is the new Federal Funds rate."

Those managing capital whether at the individual or institutional level have a very difficult time of it today because asset prices are being buffeted by powerful but countervailing crosswinds. The deflationary forces of credit contraction put downward pressure on asset prices, but central-bank money printing and other liquidity measures push up from below. Rock-bottom interest rates are forcing investors out of the risk curve, but few are comfortable with the alternative choices they have. Many investors instead are looking to minimize risk now, but they're not sure what is safe anymore. Raise cash that's being eroding in purchasing power by inflation? Or hunker down in bonds that yield next to nothing and will have their value clobbered when interest rates eventually rise?

On Investing in a Peak Oil World

BP’s statistical review came out the day before we’re doing this interview, and what I found rather fascinating, Chris, is they said if you take a look at global energy, 87% is run on fossil fuels, 2% on renewable. We discovered a new way to get at reserves that we couldn’t get at before; that has allowed for this. 

This has maybe bought us a little time. But these 80 barrels/day wells do not replace the 10,000 barrels/day to a 100,000 barrels/day [we're used to]. The great giants that are now going into decline.  When those go into decline the energy industry has to go faster just to increase supply.

We’re in the inflation camp, and so one of the things that we look at is owning real assets, whether it’s owning shares in companies that produce stuff that people need and what we have done from 2008 is, we have come up with a three-part component to the way we manage money.  At the very top is what we call our "macro model," and we take a look at the business cycle, here in the United States and the major economies. When that business cycle, whether it’s the leading economic indicators, like the ECRI weekly leading index, when they begin to roll over, that tells me one thing, the economy is going to slow down, we’re going to see the stock market take a hit, we start raising cash.  The other thing that we do is we’re investing more in things that people have to have.  You and I have to turn on the lights, we have to bake in the oven each night, we need consumer staples, so we’re less invested in things that are luxury type items. We’re investing in places where people can save money.

If you’re an average Joe out there working for a company, you can’t go to your boss and say, You know what, oil has gone from $75.00 in October to $115, I’m paying over $4.00 at the pump, my food bill just went up, they raised my cable, my utilities; I need a 15% pay increase to keep even with inflation. 

Gold and silver is a key component in all of our portfolios. 

We have had to learn to manage money differently.  We are seeing the business cycle being compressed.  If you take a look at the '00 decade, we had two recessions within a decade, and then if you take a look at this new decade, we have had monetary stimulus and fiscal stimulus every single year. And so I think we’ve almost compressed the business cycle to a one-year cycle.  Oil is the new federal funds rate. We have had to be more adaptive and flexible because that’s how the economy is working with all the intervention.  

 On the Euro

You know, the problem is, it’s a dysfunctional currency.  It’s a currency without a country: You don’t have a Treasury, you don’t have taxing authority, and you don’t have a fiscal policy that you can implement.  Basically all you have is money printing. 

 On Headwinds in the U.S.

As we get into the Fall, just before the elections, we’re going to have to come up with a budget for 2013.  Now what’s strange is, we haven’t had a budget in this country in the last three years, and it’s unlikely we’re going to come together with a budget for 2013 fiscal year, which begins October 1. 

Secondly we’re going to be butting up right against that debt ceiling.  We’re going to have to come up with an extension of the debt ceiling debate.

Then we have this Fiscal Cliff that comes due January 13, 2013.

And we have the $1.2 trillion in sequestering.

We have three waves of tax increases. In fact, I’m doing a special on the show this week. We’ve got the 10% tax rates rising to 15%, the 25% to 28%, the 28% will rise to 31%, 33% to 36%, 35% to 39.6%. The marriage penalty goes away. The middle class estate tax goes from 35% to 55%, the exemption drops from $5 million to $1 million. And then the capital gains rate goes from 15% to almost 24% if you factor in the various tax hikes coming from Obamacare.  Dividends will go from 15% to 43.4% and that’s only the first wave.

Then we have all the tax increases that are going to be coming in. The Medicare payroll tax rises from 2.9% to 3.8% next year. We will be taxing medical device makers. We are going to give a haircut for medical itemized deductions.

And then the third wave is the alternative minimum tax and employer tax hikes that go into effect.

As we get closer to the Fall, you’re going to see, and I think you’re seeing it right now, we know that corporations are building up cash.  We know that the amount of business hiring has slowed down because businesses are saying, I don’t know what the rules are going to be. I don’t know what the taxes are going to be.

And I think eventually investors are going to say, Do I take gains if I have it in a stock and sell it now, or do I run the risk and gamble that they’ll resolve this issue next year?  I think that’s another hurdle that we’re going to be approaching as we get to the end of the summer.


 Click the play button below to listen to Chris' interview with Jim Puplava (51m:52s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/jim-puplava-oil-is-the-new-federal-funds-rate/

Excellent interview!  Have followed Jim P and value his insights as well as his balanced approach to the craziness going on.  Like Chris, he has a knack of bringing the obscure to focus -  another beacon of light in the fogg as it were.
Anyway, most glad that Chris includes him …  with this many smart guys to listen to, how can I go wrong??