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'It's going to be much worse'
Famed investor Jim Rogers sees hard times ahead for the United States - and a big opportunity looming in China.
By Brian O'Keefe, senior editor
Jim Rogers says the Fed, and Fed Chairman Ben Bernanke, are out of control.
Legendary investor Jim Rogers made a bundle by anticipating a boom in commodities.
NEW YORK (Fortune) -- You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer. And with fears of a recession sparking both a worldwide market sell-off and emergency action from Federal Reserve chairman Ben Bernanke, Rogers again looks prescient - just as he has over the past few years as the China-driven commodities boom he predicted almost a decade ago began kicked into high gear. But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.
"I'm extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks the economy desperately needs.
"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."
Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."
Where the opportunities areThe 1970s, of course, was when Rogers first made his reputation - and a lot of money - as George Soros's original partner in the Quantum Fund. And despite his gloomy outlook for the U.S., he still sees opportunities in today's world. In fact, he sees the recent correction as a potential gift for investors who know where to head in global markets: China.
Rogers has been fascinated with China ever since he rode his motorcycle across the country two decades ago, and he's been a full-fledged China bull for several years. In December he published his latest book, an investor-friendly tome titled "A Bull in China: How to Invest Profitably in the World's Greatest Market." And that same month he sold his beloved Manhattan townhouse for $15.75 million to a daughter of oil tycoon H. L. Hunt and moved his family full-time to Singapore - the better to be closer to the action in Beijing and Shanghai. (He bought the New York mansion 30 years ago for just over $100,000; not a bad return on his investment.)
But in a November interview I conducted with Rogers, he admitted that he was rooting for a serious correction in China to cool off an overheating market and bring back prices to a reasonable level. With the bourses in Shanghai and Hong Kong both some 20% off their recent highs as of late January, Rogers says he's starting to consider new investments.
"I'm delighted to see what's happening in Shanghai and Hong Kong," he says. "As I've said, if things hadn't cooled off, the Chinese market was in danger of turning into a bubble. I find this most encouraging. The government's been doing its best to try and cool things off. Mainly they've been trying to deal with real estate but it's having an effect on stocks, too. I would suspect the correction isn't quite over in China. But I'm gearing up. I didn't put in any orders for tomorrow but I'm starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I'm starting to think about buying new shares in China for the first time in a while. And I'm not thinking about buying in America."
Ultimately, Rogers doesn't think that the troubles in the United States will be much of a drag on the prospects for the People's Republic. "Anybody who sells to Sears (SHLD, Fortune 500) or Wal-Mart (WMT, Fortune 500) is going to be affected, without question," he says. "Some parts of the Chinese economy are going to be untouched, however. They won't even know America's in recession. They won't care if America falls off the face of the earth."
What's on his China buying list?
Rogers says it will depend in large part on which stocks come down to the right level, but he's keeping his eye on certain high-growth sectors including tourism, agriculture, power generation and airlines.
The pullback in commodity prices on recession fears hasn't dampened his enthusiasm for resources investments, either. More like a cyclical correction in the middle of a long-term bull market. "Certainly some commodities are going to be affected," says Rogers. "But it's not as if the markets haven't figured this out. Remember the old expression: 'Dr. Copper is the best economist in the world.' Well, Dr. Nickel and Dr. Zinc figured out a few months ago what I thought I had figured out, that we were going to have a recession. Nickel is already down 50%. Other commodities may fall more. But I don't see the economics of agriculture being much affected at all. Maybe there will be a few less cotton shirts bought. Maybe there will be a few less tires bought. But the supply is under more duress than the demand."
Once again Rogers draws on the 1970s in his analysis. "Think about the story of gold in the '70s," he says. "Gold went up 600%, and then it started correcting. It went down nearly every month for two years, nearly 50% from the high point. And everybody said, 'Well, that's the end of the gold market. It was just a fluke. It's over.' It scared everybody out. And then gold turned around and went up 850% from that level. This is what happens in markets. But the fundamentals of the secular bull market in commodities are not over any more now than they were for gold in the '70s."
Where he expects the pain to be most intense is on Wall Street. He says he hasn't covered his short positions on the investment banks or Citigroup (C, Fortune 500) and won't for a while. "Those things are going to go way, way, way down," says Rogers. "The investment banks are down now because of the problems in the credit market. Wait until the effects of the bear market come along. If you just go back and look at other bear markets, investment bank stocks have gone down enormously. We haven't gotten to that stage yet. It's going to bring their balance sheets under duress. This is going to get much worse. But that's where there have been excesses for the past decade or so. And whenever you have a bear market come along the great excesses of the previous period are the ones that get cleaned out the most."
He'll be watching - from Singapore.
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JOHANNESBURG (ResourceInvestor.com) -- Lindsay Williams for Resource Investor speaks with Jim Rogers, co-founder of the Quantum Fund, about the financial woes hitting the U.S. markets - and where to put your money.
RESOURCE INVESTOR: Jim Rogers started the Quantum Fund with George Soros a couple of decades ago, probably three decades ago actually. He’s a legendary investor. He’s a bestselling author and he’s a prolific commentator and never a day goes by when you don’t see him on Financial Times Television or Bloomberg or listen to him on the wireless and he’s on the wireless now.
Jim, before we get into what’s happening with commodities, which is one of your favourite subjects, what do you think about the recent market action?
JIM ROGERS: Not very surprised. I’m just – the only surprise to me is why didn’t it start sooner. I’m afraid we’re going to see much worse before the year’s over. America’s going to be in its worst recession for some time. We’ve had the worst housing bubble we’ve had in American history, maybe even world history. So, unfortunately, it’s not good news. There’s still many problems to be revealed and more losses to be taken.
RESOURCE INVESTOR: Yeah, it really does appear to be so. I wonder what Mr. Bernanke’s going to be doing. But what it amounts to is the same policy that they’ve always employed when they get a small so-called crisis; instead of letting the cycle run its natural course, they chuck money at the problem. Do you think he’s going to do it again?
JIM ROGERS: Of course he is and it’s just going to make it worse, you very astutely pointed out instead of just letting the cycle run its course – the Japanese tried for 15 years to keep propping up, you know, zombie companies, etcetera, etcetera, and it took them 15 years and they’re still aren’t out of the woods. They should just go ahead – recessions are common. We’ve been having them every five or six years since the beginning of time. They’re good. They clean out the previous excesses. They let the system start over with a sound basis.
I mean, obviously, some people get hurt, but we have a lot of safety nets in place now throughout most of the world so that it’s not the end of the world and the amount of money spent trying to prevent a recession in the end costs a whole lot more than just letting the world have its recession then get on with it.
RESOURCE INVESTOR: Yeah, I’ve been writing an article on Allan Greenspan and his tenure for a local magazine, Jim, and I’ve been surprised at looking at some of the quotes that have been attributed to Greenspan ever since he took over as Fed Chairman in 1987. I’ll just read one to you if I may briefly. It says – he said the following back in 2003, 2004, “Innovation has brought about a multitude of new products such as sub-prime loans and also niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit scoring models and other techniques of efficiently extending credit to a broader spectrum of consumers.” I mean the more I read about Greenspan, the more I realize he’s at the root of our current problems.
JIM ROGERS: Oh no, of course he is. I mean he’s laid the foundation for the demise of the Federal Reserve. Between Greenspan and Bernanke, we may see the Federal Reserve fail. We’ve had three central banks in America. The first two failed. This one’s going to fail too. I mean if you really – we could spend a whole program, a whole year of programs, reading quotes from Greenspan and you would realize what a fool he’s been.
In my book, “Investment Biker,” I wrote that the man was a fool. I’ve been on TV many times talking about, oh, he just sat and watched CNBC and repeated it and said, “This is the way the world is.” He never got it right, Lindsay. What was so astonishing to me was that his PR machine made some people think he was a smart guy. He never got it right in his entire investing career. I could go back over many of his failures too, but let’s go on with the program.
RESOURCE INVESTOR: Yeah, let’s do. But briefly, before we leave the subject, do you think that Bernanke is just going to become another Greenspan?
JIM ROGERS: He’s worse. All he knows is to print money. His whole intellectual career has been spent studying the printing of money. America’s now given him the printing presses and all he knows to do it to run them. He doesn’t know about markets. He doesn’t know about foreign currencies. We know now he doesn’t even know about economics. I mean, he’s got a PhD in economics and he was a professor of economics, but he doesn’t have a clue about economics.
I will quote you – I hate to quote you, but one more time - I was watching him testify before congress and I almost fell out of my chair. He said under oath, so we presume he wasn’t lying, that he was just a fool, he said if an American only buys American products, it does not matter to him if the value of the U.S. dollar goes down. He will not be affected. I was looking at the man to see if he was lying, giving government propaganda, but then I could see he didn’t even really understand.
He didn’t understand if, you know, even if say I’m an American, Lindsay, and I only buy American tires. Well if the price of foreign tires goes up, obviously the price of American tires are going to go up too. Plus, if the dollar goes down, the price of rubber’s going to go higher, etcetera, etcetera, etcetera.
So the man doesn’t even understand economics. He’s going to print money. He’s going to throw money out the window. The dollar’s going to go down further and further and further. Inflation’s going to get worse and worse and worse throughout the world – the world, not just America - and we’re going to have a worse recession in the end.
RESOURCE INVESTOR: He says that the inflation problem is a lesser problem than a slow-growth cycle. What would be your comment on that analysis?
JIM ROGERS: Well, no. You know better than that. Inflation damages everything. It distorts all economic planning, all economic decision making. A slow economic profile or whatever he called it – we get over recessions. They end. But once you start embedding inflation into the entire nation’s economy, that’s one thing. Then it changes everything. It changes currencies. It changes foreigners’ perceptions of their own economy, their own currency, their own cost of doing business.
You know, what he’s doing is going to – he’s trying to save a few guys on Wall Street, a few friends on Wall Street, but what he’s really going to do is damage 300 million – well not just 300 million Americans - he’s going to damage the whole world. But he doesn’t care. He’s just looking to save his friends on Wall Street, and he thinks he’ll go down in history as a smart guy. Going to go down in history as one of the two gigantic failures of central banking.
RESOURCE INVESTOR: Right. Let’s say that there is a recession as you seem to believe the U.S. already in recession and that recession will come deeper. Does that change your view on commodities, because if there’s a recession in the states then it could affect, obviously, world growth and therefore the growth of commodity demand? Does that worry you?
JIM ROGERS: Maybe temporarily it’ll cause a slowdown in commodity demand, but that makes the long term bull case even greater because if all of a sudden the commodity producers think, “Well, this is not real,” then they’re not going to go out and open that new zinc mine and they’re not going to go out and look for that expensive oil. They’re not going to spend a lot of the money they might have spent otherwise.
So it just prolongs the whole secular bull market. No, absolutely. You have corrections and consolidations in every bull market no matter what the asset. You always have. That’s the way markets work. Nothing goes straight up, Lindsay. You know that. So if commodities go down for a quarter or a year or two, it’s not the end of the bull market. As I said earlier, it’s probably going to make it even last longer.
RESOURCE INVESTOR: The bull market in commodities is – has been – has had various cycles, various components to it. The agricultural one is the one that you picked quite a while ago. And more and more commentary that I read says it could last for decades. So I mean it’s a very simple equation. There’s more demand and there’s less supply. Are you becoming more confident of agriculturals?
JIM ROGERS: Well, I’ve been buying them in the recent past, a few weeks ago. I bought more ags, yes. Agriculture is the best place – one of the few places - where I would put money in the investment markets right now. I’d buy agriculture. I’d buy the renminbi, the Swiss frank, the Japanese yen, but beyond that, there’s not much I see that I would be buying. Agriculture’s still extremely depressed on a historic basis. There are very sound and strong fundamental changes taking place for the better.
People who say it’s going to go on for decades, I’m dubious, if you don’t mind my saying so because I mean, I’ve seen this before in bull markets and read about many of the bull markets. None of them have lasted forever. This one probably won’t either, but if it lasts another 10 or 15 years I’ll be quite happy.
RESOURCE INVESTOR: Looking back at Wall Street now, I just noticed this afternoon, Bank of America came out with its earnings. Its earnings have dropped, it says here, 95% after $5.28 billion of mortgage related write-downs. The American investments banks was one place you said you didn’t want to be about a year ago. Do you think they’re staring to show some value now that they’ve been so badly whacked?
JIM ROGERS: Well, what I actually said a year ago was that I’d sell them short and I’m still short. No. They don’t show value at all. If they rally, I’m going to short more. I mean Bear Sterns still sells at $77.00. Merrill Lynch still sells at $53.00. You know, in real bear markets, Lindsay, these stocks are going to sell at $10, not specifically those two, but all the – go back and look at previous bear markets. Investment banks get killed for many, many, many reasons. Their inventories go down, their customers dry up, everything goes bad and the stocks sell at, you know, very, very, very low prices. Let them rally. I’m going to sell more.
RESOURCE INVESTOR: Yeah, the argument that I get from a lot of fund managers in South Africa when it comes to the argument over banks is that they’re historically on very low price earnings ratios and their multiples are low and they come up with every single excuse in the book as why we should be buying them and every day I see them going down further. So what you say you can throw that sort of historical analysis out the window? In a bear market, they’re the ones that are going to suffer?
JIM ROGERS: Of course they are. I mean first of all, the earnings are phoney earnings. I mean the balance sheets are phoney balance sheets. They quite openly acknowledge these days that they have something they call tier three assets. Well, tier three assets are assets that they don’t price because they can’t price them and so far, the accountants have let them get away with that. Well, soon, the accountants are going to make them admit that those tier three assets don’t have much value and you’re going to see huge write-downs.
And remember, the stocks are down now, Lindsay, because of what’s been going on in sub-prime, etcetera. Wait until they start getting affected by the bear market. They haven’t even been affected by the bear market yet. But when customers dry up, trading volumes dry up and mergers and acquisitions dry up and the earnings will really dry up.
RESOURCE INVESTOR: You paint a very gloomy picture for the future, Jim. I noticed in one of the....
JIM ROGERS: Oh, no, no, wait. What’s gloomy? Hold on. What’s gloomy? That was gloomy for Wall Street. I told you if you’re a farmer, you’re about to get rich. What are you talking about gloomy?
RESOURCE INVESTOR: Gloomy for those poor Wall Street people.
JIM ROGERS: A lot more farmers in the world than there are Wall Street bankers.
RESOURCE INVESTOR: Yeah, well said. I noticed you, in an article in one of the news wires that you’d sold your townhouse in New York. Is there – are you clearing out?
JIM ROGERS: Well, I’ve moved to Singapore. We’ve moved to Asia. So, clearing out? Yes. I’ve moved to Asia. I don’t have any – I don’t have a home anywhere in America anymore. I’m still an American citizen, but no. We’ve left.
RESOURCE INVESTOR: Jim, if you want to get into the agricultural market, what is the most efficient way to do it if you don't have the wherewithal to be able to utilize, you know, the Chicago Board of Trade and things like that. Are there indices that one should look at without having to monitor them every day, a simple way of getting in, in other words?
JIM ROGERS: Well, Lindsay, I mean many academics and many consultants have demonstrated over and over again the best way for most people to invest in anything, stocks, currencies, whatever, is through an index. I’m not the first to come up with that and you either. That’s been demonstrated too many times. People who invest in indexes outperform 80% of active fund managers year after year after year.
So the best thing for most people to do is buy an index. I mean first do your homework and decide, “Yes, I want to buy stocks. Yes, I want to buy American stocks. Yes, I want to buy commodities,” whatever it is. And then if you decide you want to buy that asset class, the best way to invest, no matter what the asset class, is to buy an index.
(Resource Investor Podcasts are now available on iTunes! Simply download iTunes, go to the iTunes Store, and click on “Power Search” in the Quick Links box on the right-hand side. Search for “Resource Investor” in the title box, and subscribe. The iTunes Store will automatically update your iTunes when a new podcast becomes available.)
Jim rogers...toujours à l'achat sur l'agriculture.
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