Talking Markets: Jim Rogers

Jim Rogers

Jim Rogers, co-founder of the Quantum Fund, pulls no punches in this on-the-record discussion with Independent Investor about the current global investment outlook. Topics covered include; China, the dollar,the debt crisis, commodities, gold and silver. Few market pundits talk more sense, or in a more accessible way.  You can listen to the interview (20 minutes long)  here. Or click here to download Q and A – Jim Rogers 13 June 2010.

I’d like to start by asking you to explain what you think has been happening in the markets in the last month or so. They’ve been very jittery – we’ve had the Eurozone crisis, we’ve had the Israeli situation, we’ve got worries about Korea and so on. Are these worries you share, or is this just normal market action that we’re seeing here?

I hope you and everybody is worried too because, you know, we have great imbalances in the world that have to be sorted out. I mean, we’ve got gigantic debtors in the West, and gigantic creditors in the East, and we’re going to have more problems: more currency turmoil; we’re going to have more financial problems – this is not over yet.

Some people are saying that there is a serious risk of returning to a re-run of 2008 and the banking crisis – is that something you share?

Well, of course I do. There’s no question about that. It may not be the same actors, it may not be the same format, but, again, the United States essentially is bankrupt, the UK essentially is bankrupt. There are a lot of companies and countries in Europe which are getting a lot of press right now, but nobody can pay off these debts.

I’m not the only person who knows them, and the United States has spent a lot of money, as has the UK and other people, and the people who received the money think things are better, and they are better for them, but remember gigantic amounts of money have to come from somewhere, and in the end, the whole system is weakened, the world economy is weakened, and we’re going to have more problems.

So does that mean you think we are going to get a double-dip recession in the States, for example?

There’s no question in my mind we’re going to have another recession in the US. We’ve had recessions every four to six years since the beginning of time. I would suspect it’s going to come before 2012 this time around, just because the situation is so bad, but whenever it comes, even if we don’t have a recession which causes problems in the financial market, we’ve got these currency market problems.

You know, the largest creditor nations in the world are now China, Korea, Japan, Taiwan, Hong Kong, Singapore, and the largest debtor nations – well, you know the largest debtor nations. These imbalances have not been sorted out yet, and normally they’re sorted out in the currency markets, they used to be sorted in the global market. We don’t have a gold standard anymore. You’re going to see a lot more turmoil which is going to affect a lot of financial institutions.

Do you think this is something that the governments in Asia are conscious of?  I mean, they’ve been very heavily criticised for their part in the imbalances, but of course it does take two to create a crisis like this, or volatility like this. Do you think that there is going to be some kind of multilateral global solution to this in the end?

If you really think that 20 bureaucrats can get around and solve these problems…  Everybody has their own interests. I mean, look at what’s happening right now. The Euro has gone down a great deal. The European bureaucrats think this is wonderful because it makes them more competitive. You know, you don’t hear the Europeans complaining about the Chinese currency anymore, because it’s gone up a great deal! Everybody has their own interest and, unfortunately for the world, they’re not going to co-operate. They may say they are, but they’re not.

Okay. So in that environment, you’ve been saying for a long time that the best thing for investors to do is to hold real assets, and presumably, there’s nothing to change that view at the moment!

If the world economy gets better, real assets – commodities, natural resources – are going to do much better, because we have shortages of everything developing. If the world economy does not get better, real assets will be a better place to be because governments are going to print money. That’s all they know to do. All the central banks and the governments of the world know only one thing, and that is to print money when things are bad.

Throughout history, when they’ve printed money, when they’ve debased currencies, the place to protect yourself and even to make money has been real assets, whether that’s agricultural products, or silver, or natural gas – that’s where you have to be. They may go down too in an environment like that, but they’re going to go down a lot less than your Toyota or a lot less than your IBM, a lot less than other things.

Well, let’s look at one or two of those real assets. Let’s start with gold – gold has gone over $1200, nearly up to $1250 I think today, but I think you still think that silver is a better bet than gold, is that right?  How do you rate those two metals at the moment?

Well, I own both. It’s not that I think silver is so much better; it’s just gold is making all-time highs, as you rightfully pointed out. Silver is 70% below its all-time high. I would expect that we would probably make more in silver over the longer term than gold, but that’s only because silver is so much cheaper. Who knows?  I may be wrong. I own both. I’m certainly not selling my gold to buy silver, but if I were buying a new one today, I would probably start with silver.

And what about some of the other precious metals –do you own those as well?  Obviously some of them are more industrially sensitive than others.

I do own palladium. Palladium is well over 50% below its all-time high. Platinum is, 30% or 40% below its all-time high. I own them. I suspect that one would make more money in those too than in gold, but again, I’m not selling my gold to buy them. And, you know, if you think that the world economy is going to get better, as I said, both platinum and palladium will do very well because of the automobile industry. If we get better, it will use more. If the world economy doesn’t get better, they still are precious metal.

Let’s quickly have a look at the soft commodity area. Obviously, some of the prices have been quite weak; others have picked up a little bit. How do you rate some of those things, such as soya beans, corn, wheat?  Do you have particular views about any of those that might be of interest to people?

Agricultural prices as a class are much, much more depressed than metals prices or energy prices. I mean, if you look at some of them, it is staggering. Sugar is 75% or 80% below its all-time high. You look at coffee, you look at cotton, you look at orange juice, and it is mind-boggling how cheap some of these things are on a historic basis.

So I would feel that probably agriculture is a better place to be than metals or energy, just because they’re so cheap on a historic basis. If you look at sugar, its down, sugar is 75% or 80% below where it was in 1974! How many things do you know that are 75% below the price in 1974?  Very few.

In your experience, what have you found is the best way to get exposure to that?  People do try to invest through the futures markets and often get a bloody face through that. Would you buy companies whose fortunes are linked with sugar price instead?  What is the best way to get involved in that market?

If you know a lot about what you’re doing in commodities, futures are the best way. If you don’t, you might try indexes. Indexes are a more balanced way for many people. If you have skills, you should become a farmer or you should buy shares in a company which is going to service agriculture, whether that’s seeds or tractors or water, irrigation companies, whatever it is.

The best way of all of course is to own the farms of the companies which are going to produce the goods, because then you get the leverage of higher prices for your soya beans and wheat as well as get the operating efficiencies and the vast profits which accrue to good producers in a bull market. But, I’m not a farmer, and I wouldn’t make a good farmer. I buy futures and indexes. I tell people all the time: instead of getting an MBA, you should go and get a Farming degree, because that’s where the fortunes are going to be made in the next 10 or 20 years.

I know you gave that advice to my son once, and he hasn’t taken it yet, but I’m working on the problem!  Hopefully we’ll get there soon!

Yeah. I was 21 years old once too, and I know, we all look and think what the last 30 years has been, and we all want to go to the City of London, but I’m telling you, the last 30 years have been disastrous for agriculture, so we should all become farmers. That’s about to change, because it has been so bad.

You live in Singapore now, and you obviously view the world from a primarily Asian perspective, geographically anyway. Can you give us some feeling for how worried we should be by the situation that’s developing in Korea?

I’m not worried about it at all. In fact, I wish I could go to South Korea and buy farmland, just below the DMZ (demilitarised zone), because I think it’s going to be sorted out, one way or the other. It cannot continue for China to let a war develop between North and South Korea. China doesn’t want a war. Nobody wants a war. Maybe a couple of madmen, but it’s going to take more than a few madmen to get this war going, because nobody will support North Korea.

Do you think eventually North Korea will be allowed to rejoin the rest of us in the capitalist world?

I fully expect there to be a merger of North and South Korea within a few years. I know that’s a contrarian view right now, and  I was there only once, for a short time, but I got the feeling that the people in North Korea are very keen to have a merger, that they know how life is in South Korea, and they know how life is in China now. I would suspect there’ll be a merger before too much longer.

I’m sure we all agree we hope that’s right.

And I would say, especially if some kind of war hostilities break out, I think it won’t take long at all for there to be a merger, because there will be a new regime in North Korea in that case, and I’m sure they’ll all want to rush down to South Korea and go to the bars. They know what’s going on in South Korea.

Talking about China, Jim O’Neill of Goldman Sachs has had to eat his hat because the Chinese currency hasn’t been revalued yet, but what do you think is happening on that score?  Do you think that is going to happen again soon or with the Euro having its problems, is that going to delay things? How do you read that situation?

The Chinese know that they have to have a freely convertible currency in order to continue to develop as a world economic power and as a world power. They have been making some moves in the past five years – not so many in the last year or two, but its currency has become much more convertible. They are continuing in that way.

I would have thought they would have made it convertible by now, so I’m not very good at the timing either. There’s no question that it’s going to happen. There’s no question they do continue to make movements in that way. You can now do business, and the neighbouring countries can now do business, in Renminbis. They don’t have to use other currencies.

When it’s going to happen, I don’t know. It could happen any day or it could be another year or two. The fact that the Euro is down a lot of course is another factor that the Chinese have to consider. On the other hand, the Chinese do have these big bubbles in real estate developing in their own country. One solution to their own internal inflation and internal real estate bubble would be a freely convertible currency. But, they don’t listen to me; they don’t listen to anybody except themselves!

One of the points we have to take on board is that there are some very smart people at the top of the Chinese governing party. Do you think they actually have a plan or are they actually locked in sort of machismo politics over this?

I think that there are too many of the old-timers around who are still afraid that if they make it convertible, all the money will leave China and the currency might go down a lot. I think that’s not going to happen. If anything, I think more money would come into China. But there are many people that still have the old communist bureaucratic thinking. Remember, the currency was not at all convertible 10 years ago. The currency smuggling, as they called it, was a capital offence. There are still a lot of those guys around who still have the old way of thinking.

On the Chinese situation, you mentioned the property bubble, that’s obviously been something that’s exercised a lot of people, a lot of investors. How effective are they being at choking off that bubble at the moment?

I should point out that the Chinese real estate bubble is mainly only in urban coastal cities.  You can go to many parts of China and you will not see property has moved much at all – it’s up but nothing like a bubble. But the people in Beijing know this; they’re trying to solve the problem. They’ve made many steps and I suspect there’ll be more. You’re probably going to see some real estate speculators or investors in coastal cities going bankrupt in the next couple of years.

I don’t think it’s going to be the end of the world for China. The Chinese bubble is a price bubble. It’s not a credit bubble, as it was in the US and in the West. In China, you have to have a job, you have to have income, and you have to make a down payment. In China, you can only buy a certain number of properties. It’s not like in the US, where you could buy many houses, with no money down and no job, and then of course the bankers went and took the resulting mortgages, and made them even more leveraged. That was a very serious credit bubble.

That certainly was. How unimpressed are you with the response of the American authorities to the economic crisis that’s continuing over there?

They’re going to be ruination of all of us. The idea that you can solve a problem of too much credit and too much consumption with more debt and more consumption, it defies imagination that grown-ups could stand there and say something like that and think that’s going to solve the problem. It’s making the situation worse.

You know, the Central Bank in America now has three or four times as much debt as it did before, and now its garbage. Before, they at least owned government bonds. The United States Government’s debt has at least quintupled, and probably much more and this is only in two years. This is not solving our problems; this is making it worse.

People say, “Oh my, what about our poor grandchildren?”  Forget our grandchildren!  This is the problem for us, today!  This is a problem for our parents, if they’re still alive. Forget the next generation!  We better worry about it ourselves and even the last generation, because they’ve done some really foolish things in the US.

What do you think is the best solution?  I see that Paul Krugman, who I’m sure you occasionally read, is saying they should do one thing, which is essentially keep on priming the pump, as far as I can see. How can they get out of this problem, without doing what they’re doing at the moment?

Well, we now know that Mr Krugman doesn’t know much about economics, that’s for sure, because if they continue to do this the people who get the money, yes, they’re better off, there’s no question about that, but the money has to come from somewhere, and America is already the largest debtor nation in the history of the world. This cannot go on. The currency will collapse. The bond market will collapse eventually.

Now, maybe they can do it for another year or two, I have no idea. It takes a long time to destroy a currency and destroy a nation. But the idea that they should continue this, to my mind, is mind-boggling. The only solution I know, at a time like this, is to let the people who are bankrupt go bankrupt, reorganise the system, and start over.

Through our history, many banks, many institutions, have gone bankrupt. Competent people have come in, taken over the assets, reorganised them and started over. It’s happened many times. It happened in Scandinavia 20 years ago, Mexico, Russia, and South Korea. Many people have been through this. It’s traumatic, it hurts, there’s a lot of pain for a year or two or three, but it’s the only way to start over.

The countries I just mentioned went through their pain, started over, and all had great growth periods for several years after. The US way is what the Japanese did in the early 1990s. It didn’t work then. They’ve lost two decades. America is going to lose at least another decade or two, and it is not going to work. W

hat you’re supposed to do is let the competent people take over the assets. What they’re doing now, is taking the money away from the competent people, giving it to the incompetent people, and saying to them, “Now you can compete with the competent people, with their money.”  This is horrible economics. It’s horrible morality. It’s insane.

From an investors’ point of view, that clearly would incline you to believe the dollar must weaken again and that US Government bonds are eventually a sell, but in the short-term, I think you believe that may not happen just yet.

Well, I own the United States Dollar at the moment, although, I’m starting to have second thoughts. I don’t know what I’m going to do, because now everybody in the world seems to be positive on the US Dollar. More than 90% of the people in the world want to own US Dollars. That’s always dangerous. The reason I bought the US Dollar, about nine months ago, was because 90% of the people were negative on the US Dollar. Now it’s gone the other way.

But yes, I certainly don’t have any confidence in the US Dollar longer term. I have no confidence in US bonds. The United States is the largest debtor nation in the history of the world now. The US Government bond market is one of the few bubbles which is developing in the world. I have not sold it short yet, but I certainly plan to some time in the future.

I heard about a conference the other day where people were asked about the Euro. And all but three out of the 600 were negative on the euro. 597 were negative and three were positive.

That’s what is sinking into my head these days. Throughout my experience, in markets, you nearly always should go against the tide in that kind of thing. I own some Euros, but I haven’t jumped in to buy more, not at this point anyway. The very fact that you have now told me this may cause me to do something later on today!

Well good luck, and thanks again for your time today, Jim.