|
Jim Rogers' Interview in
India - How to Prepare for High Inflation
|
Recently, The Economic Times interviewed Jim Rogers in India. See
Fund
Managers Can Become Farmers. During this interview, Rogers shared some very good investment wisdom and shared more specifics than usual about his own portfolio. Here is an excerpt:
"Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed ... so, it's going into stocks and real assets such as commodities. It's a mistake what they are doing. It's giving short-term pleasure, but there's long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road. The American bond market is already beginning to go down dramatically as people
realise that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money ... When you have a currency crisis, stocks will be affected, many things will be affected."
Q:
Jay, what do you think about this and all Rogers said in the interview?
A:
This is some of the best investment wisdom and info I have seen in at least the last 3 years, if not longer.
I recommend you print it out and read it. Read it again. I would focus on one of the "hidden" pearls of wisdom. Realize what you don't
know. It's as important to understand what you don't know as what you
do know. Here's what I don't know about Rogers' portfolio:
- His percent in cash?
- In what currencies is his cash, and percentage in each?
- His percent in Chinese water and Ag companies?
- His percent in farm land and other real estate?
- His percent long in stocks, and short of stocks?
- How much does his total physical commodity portfolio (including gold and silver) differ from RICI? We know he started in 1999 with RICI only (or almost exclusively), but has since added more to Ag, energy, gold and silver, and likely sugar and cotton individually.
|
|
|
I can make some fairly good guesses (I hope), but I must operate fully aware of all the above
non-knowledge. Maybury, Russell and a few others, including the Permanent Portfolio concept will help. After this article came out, Rogers revealed that he has covered all his stock market shorts, and has no long stock positions with the single exception of China. I would take it very slow, and do nothing drastic or fast. I'm very happy with my current allocation.
Q:
Rogers said he's been buying the following. What is your response to these moves?
- Water purification companies in Asia (due to lack of clean water and growing population, especially in China and India)
- Chinese Agriculture (due to farmers can't get loans for
fertilizers, inventories lowest in decades)
- US Agriculture (due to farmers can't get loans for
fertilizers, inventories lowest in decades)
- Gold and silver mining (since nobody can get a loan to open a mine)
- Silver (75% below its all-time high)
- Cotton (due to ethanol / oil shortage causing crop changes)
- Indian tourism
- Sri Lanka
A:
Since he hasn't told us the names of any stocks he owns, I would not consider investing in China, India or
Sri Lanka. I am very happy being neither long nor short of any stocks, with the single exception of mining shares. I'd be happy to add to RJA at today's price if I were under my 1/6 (17%) in Rogers commodity ETNs. I'd also add more GDX and SSRI if I were under 1/6 (17%) in mining shares.
I would also consider more silver if I were under 1/3 in gold and silver. As for cotton, Rogers has no individual commodity ETNs, so it's probably wiser to stay with the diversified ones, RJA, RJN, RJI.
Q:
Most of us do not have tons of money like Rogers does, so how can we apply his moves to our own portfolios?
A:
You have exactly what God intends you to have (as do I). You can use our allocation plan on $1,000 or $1 million.
Q:
In the interview Rogers said, "It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,000,000 ... Which is one reason why I am not shorting stocks right now. Because there is a possibility of this sort of a thing. There is a possibility that stocks could go through unheard of levels, but would be in worthless currency."
This seems reassuring for those of us who hold our commodity ETFs and mining stocks which are valued in US dollars. Do you agree?
A:
Yes, stocks are non-dollar assets. That's one thing he's telling us. Look at the
Zimbabwe stock market. It kept many citizens from losing everything. So did the German stock market in 1923 during the Weimar hyperinflation. (See the
articles for further study below.)
The big point made by Rogers is that during hyperinflation you want to be neither long nor short of stocks, nor long of the currency being reduced to zero.
Q:
So based on these recent comments, are you making any changes to your
portfolio now to prepare for high inflation?
A:
Based on everything I have learned from my experts (especially Rogers, Maybury and Russell), I am very comfortable with my current portfolio allocations. The following is a simplified way of analyzing
it.
A Simple Way of Looking
at Jay's Portfolio
- 1/3 Cash (bank account or money market)
- 1/3 Gold and Silver
- 1/3 split between mining shares and commodity ETNs or ETFs
This is very close to my current allocation.
(See Jay's
Portfolio.)
The Logic Behind This
Allocation
- We must have at all times protection against US dollar Deflation (collapse of the debt pyramid - widespread debt defaults). We must have 1/3 US dollar cash.
- We must have at all times protection against inflation or hyperinflation, because over time the probability of inflation is much higher than of deflation, and we are perhaps half way through a secular commodity bull market. Thus, 2/3 of this portfolio is in non-dollar assets. This is consistent with our experts.
Notes of Caution
- The timing on the purchase of any single investment in the portfolio could be bad in the short term. For example, it might be a year or more before gold goes above 1000 again, and it might fall to 700 during that time. The same is true for any of the other investment. But
I would be willing to buy this entire portfolio at one time and wait for time to prove its merits. It is based on the permanent portfolio concept. If someone starting a new portfolio today asked me what I would recommend, this would be it. I would recommend buying the whole portfolio at one time, which is exactly what you do when you buy the permanent portfolio.
- As long as you are approximately 1/3 in each of the three big categories, your individual holdings don't have to be exactly the same as mine. For example, you could hold 4 or 5 different mining share positions as long as they total no more than 1/6 of the portfolio. But I will be emphasizing GDX and SSRI over all others.
- You can hold as many commodity ETNs or ETFs as you wish, but I will probably gravitate almost entirely to RJA, RJN and RJI because that will be following Rogers. Keep the total to no more than 1/6 of the portfolio.
- Split your gold and silver any way you want to, but make the total around 1/3. Acceptable vehicles include coins, bars and CEF. For IRAs or 401-Ks acceptable vehicles currently include SLV, GLD and CEF.
SPECIAL NOTE ON GOLD AND SILVER: Many of the hard money experts (including the ones I follow) recommend a total allocation to gold and silver of 10% to 20%, while I recommend 30% or over. There are two reasons I do. First, I believe we are approaching the later part of a secular gold bull market which occurs only once or twice in a lifetime. If I am right, gold should rise several hundred percent over the next 3-5 years. Second, my study of the Bible convinces me God created gold and silver for the purpose of serving as honest money for mankind, and He said,
"Dishonest scales are an abomination to the LORD,
but a just weight is His delight. (Proverbs
11:1 NKJV) He also said, "You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving
you. (Deuteronomy 25:15 NIV) There are over 400 references to gold and silver in the Bible. I plan to do an essay on the subject if I can get to it. I could be wrong, so you should let your own convictions determine your gold and silver allocation. But if I am right, if gold and silver are the ultimate honest money, then think about this:
2/3 of my portfolio is cash, and at the same time 2/3 of my portfolio is non-dollar assets. How can this be? Very simple: The 1/3 gold and silver is both cash, and at the same time a non-dollar asset.
I believe this is the safest possible portfolio in today's financial world situation which also offers a good upside potential.
- Finally, If you are not comfortable following my portfolio, and want to keep your risk low, by all means stay with the
permanent portfolio (PRPFX). It has served investors well for several decades.
Articles
for Further Study
Zimbabwe's currency crashes, prices rocket (June 5, 2008)
Annual inflation up to around 1,800,000%; Zimbabwe Industrial Index hits 900 billion points, up from just over 1.2 billion points at the start of the year.
Bears Steal the Market (Dec. 2, 2008)
"In real terms, the ZSE is the best performing stock exchange in the world. The Zimbabwe Industrial Index up some 7399% since the January 2007 and 12 000% over twelve months is three times in excess of the increases in consumer prices ... Increasingly, the only means for the government to fund itself has been money-supply growth. The stock market is the primary beneficiary of the fresh money ... The relative stock market outperformance relative to general prices of other goods such as food or clothes will continue as long as this monetary process is allowed to continue. Regardless of the temporary crash, by the end of this year, the ZSE is on course again to being the best performing stock exchange in the world as long as the government continues with its affinity to print money."
Inflation in the Weimar Republic
"Those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations."
The Nightmare of German Inflation
|