Jim Rogers Defends His Long-Term Stance

    

Recently, CNBC had a power lunch interview with Jim Rogers and several other financial pundits. (Sue Herrera was the moderator.  The pundits included Scott Cohen, Howard Lutnick, Bill Griffith, Larry Kudlow, Rick Santelli and a man and woman called “Scott” and “Betty” in the text below.)  During this interview, Rogers shared some very good investment wisdom.  To watch the 4-part video, click on the following links: Part 1  Part 2  Part 3  Part 4.  Below are some excerpts along with comments from Jay.     Sue: You have some basic advice at this point in the markets. You say stocks could go to crazy levels… Rogers: Well, they are printing so much money that I would not be short. I have no shorts, and most of my life I have always had a short, or two or three, or sixteen. But I’m afraid they are printing so much money that stocks could go to 20,000 or 30,000…of course it would be in worthless money, but it could happen and you could lose a lot of money being short, so I have no shorts. I’m worried about the currency markets. I expect there to be a currency crisis later this year, or maybe next year… Jay: Later in the interview, Rogers added this about stocks: "Listen, stocks could go to 5,000. I'm not suggesting they are going to 20,000. I'm saying they could, and that's the reason I don't have any shorts. I'm protecting myself by owning commodities. That's my play."     Sue: So you’re not shorting, but what can you do to protect against that? Rogers: Well, you can buy hard assets, real assets, which is what I am doing. But if the world economy is going to get better, commodities are going to lead the recovery, and if the world is not going to get better, they’re printing so much money that commodities are going to be the best place to be.

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Jay: This is the simple thesis on which he is basing his strategy for the next 5 to 10 years.
 

 
Scott: Doesn’t this argue that if you feel lucky maybe you should buy some stocks, at least for the short run?

Rogers: Well, I’m not very good at luck. I don’t base my investment decisions on luck. I just see so many problems in the world economy…most industries are getting worse… the fundamentals are not getting better. The fundamentals are getting better for commodities. The fundamentals are not getting better for General Motors or Citibank.

Jay: His working hypothesis, stated repeatedly over the past 10 years, is that we are in a long term (17-20 years) secular bear market in stocks, and simultaneously in a long term secular bull market in commodities.
 

 
Scott: It’s good for a trader, isn’t it?

Rogers: Yes, but I’m the world’s worst trader. I’ve been coming here for twenty years. You know I’m the world’s worst trader. 

Jay: Studies show that 95% of short term traders lose or get lower than an average return. Get with the long term secular trend and stay with it until it becomes a bubble (the crowd is in it) then sell. This is how the great investing fortunes have been made. There are a few great short term traders, but they work at it full time. Some of them have eventually been wiped out. See Letter 33 - The Experts' Strategy Made Simple for details on Rogers’ strategy.
 

  
Scott: So if we have the currency crisis you’re talking about, and it creates fear or panic around the globe, won’t the US dollar still be the premier place to go? Wouldn’t a currency crisis actually enhance the US dollar?

Rogers: Then I urge you to buy the US dollar if that’s your view. I happen to think the US dollar is going the way of all flesh…it’s going the way of the Pound Sterling. No, the US dollar is a terribly flawed currency. We’re the largest debtor nation in the history of the world. Never in history has a country gotten itself in this kind of situation. You may want to put your money in the US dollar, and some people are, but they are fewer and fewer. You know what the Chinese are saying.  You know what the Russians are saying. (See articles for further study below.)  You know what everybody’s saying. There’s something wrong with the currency market. I’m not the only one that knows it.

Jay: Note that presently more than two-thirds of my portfolio is allocated to non-dollar assets.  (See Jay's Portfolio.)
   

 
Sue: Well, we’re going to talk to you about commodities a little bit later. We don’t want to jump the gun on that. There are also those looking at what’s happening in the bond market right now, and saying it is indicating growth. And there are others saying what’s happening in the bond market right now is indicating inflation.

Rogers: Of course it is. It’s indicating two things. It’s indicating crazy inflation coming, and it’s indicating gigantic debt is coming which the US government is going to have to sell. That’s how I’m going to protect myself, eventually. I’m going to short bonds. I should have shorted bonds already…of course you know what’s happened. But that’s going to be the best protection. I’d rather short bonds than short stocks in the foreseeable future.

Jay: I may short bonds someday, but I am uncomfortable doing it now. Just a personal conviction. I don’t have to do it to follow Rogers’ basic strategy.
   

 
Betty: And you’re also very heavily invested in emerging markets. How do you see emerging markets performing if this “currency crisis” happens?

Rogers: I’m not heavily invested in emerging markets any more, but I am invested in them. I do have Chinese shares…well, if I’m right about the way the world is going to evolve, and it’s going to natural resources, then many of those natural resource economies are going to boom, Brazil is going to be a better place to be than Belgium. Australia is going to be a better place to be than Portugal going forward. You need to put your money in places that produce natural resources.

Jay: Chinese shares are another part of Rogers’ portfolio which I don’t invest in because I don’t know which companies he owns. That makes the risk unacceptable to me because the working hypothesis is that overall stocks are in a secular bear market. Rogers has recently stated he has sold all his other stocks and covered his shorts in stocks. In other words, with the exception of Chinese shares, which he has owned for twenty years and never sold a share, he out of stocks.
 
 

 
Howard: ... I think commercial real estate has not taken the bite yet. That’s coming in 10 and 11. I think the leveraged buyout loans…every one of those deals…they are going to harm this economy the next 2-3 years.

Rogers: Howard, you are bad for my nervous system. Who do you think is printing all this money? Did you know that for the first time in world history, every central bank in the world is printing huge amounts of money? This has never happened. But it’s always led to higher prices.

Larry: Angela Merkel should run the Federal Reserve.  (See Merkel For the Fed, Wall Street Journal, June 4, 2009)

Rogers: Absolutely!!

Larry: She came with the greatest rant I have ever seen from an elected head of state in the history of the earth. She actually said Central Banks should stop printing money. I’ve never heard a politician say this before…the German Chancellor. Let me just ask you on the commercial real estate thing, which is a fair point. I’m sure that there are toxic assets there, but doesn’t economic recovery resolve that problem? I mean, when you look at the spreads in that market, they’ve come way in. When you look at the insurance option, the CDXs written against that stuff on the market indexes, they’ve all come down very nicely.

Howard: You know what? You used to be able to finance a building at a 4% expected return, a 4% cap rate, right? Now they’re all 8% and 9% expected cap rates. If you are going to refinance a building, you are going to do it at half the value of the current outstanding loan…good tenants, paying their lease, right? But I’ll tell you what. You’re financing $500 million, like the Pearson Building that Allen Mackler had to auction…you finance it up here, and now you can only finance it down here, when that goes ripping across America, the numbers that are not in banks’ numbers right now are going to be huge. And then you lever on top of that in 2012, all those leveraged buy out deals from 2006…every private equity deal from 2006…and you have constrain, constrain, constrain.

Jay: In my opinion, this man is making some astute observations which have not yet been recognized by the public. If I am interpreting correctly, his point is the hyper inflation could be delayed by four or five years.

 
Larry: If you look at a commodity chart, you have this extraordinary boom, but then roughly, I’m going to say, from the middle of last year to recently, you had a bust.

Rogers: Wait, wait, wait, hold it. You had five months when commodities went down because there was forced liquidation … AIG went broke, huge in commodities, Lehman went broke, huge in commodities…

Sue: Does it matter what the trigger was?

Rogers: It was for five months. In 1987, stocks went down 40% to 80% around the world. Was it the end of the bull market in stocks? Anybody who sold in 87 lost a lot of money because stocks went up 1,000% (following that crash.)  It was forced liquidation in 1987 for absurd reasons, but it was not the end of the bull market any more than this forced liquidation is the end of this (commodity) bull market.

Scott: So those highs last year were fundamentals? It wasn’t a commodity bubble?

Rogers: It was not a commodity bubble. Those highs will be taken out again in the course of this bull market, just as those highs were taken out.

Scott: $150 oil?

Rogers: $150 oil is going to be cheap before this is over.

Larry: But the Rogers’ Commodity Index (I follow it every other week in Jimmy Grant’s newsletter), you’re still way below the peak.

Rogers: Of course we are. But, Larry, listen to my point. In 1987 everything collapsed. They closed some stock exchanges, things were so bad. But it was not the end of the bull market.

Jay: It is a shame they didn’t display a chart of the secular commodity bull market from 1999 to the present. The CCI (Continuous Commodity Index, an index of all commodities) rose from 150 to 620 from 1999 to 2008, a rise of 313%. Then in 5-months it fell 48%. Today it is still up more than 160% from its 1999 value. An investor who bought this index in 1999, and did nothing thereafter, is up 160%, and likely holding an asset with the potential of going up several hundred percent more over the next 5-10 years. This happened in the 1968-1980 commodity bull market, during which gold went up 24 times, from 35 to 850.

 
Closing Observations 

People tend to think short term, even sometimes the experts. Short term movements in markets are absolutely impossible to predict. I have to repeatedly remind myself of statements from the legends of investing to keep from falling into the trap of thinking short term: “When you make an investment, make it for what is going to happen 3 or 4 years from now, not 3 or 4 months from now” (Peter Lynch). “The market always does what it is supposed to do but never when” (Richard Russell).

My working hypothesis based on the experts I believe God has led me to: We are in a secular commodity bull market which likely has another 5-10 years to run, and another few hundred percent gain to come. I have constructed a steel trap in my mind, put this in it, slammed it shut, and will keep it there until the experts tell me to adopt another hypothesis. I will stick with it and not try to trade in and out. If I try to trade short term, I know my emotions will kill me.

Rogers has done this. He entered the commodity bull in 1998. To date he has not sold a single commodity. On the major dips he has bought more of the ones he likes the most (especially agriculture and silver recently). He plans to sell in 2017 or later, when the commodity bull becomes a bubble.

 
Articles for Further Study

China sells US bonds to 'show concern' (Breitbart, June 17)

Chinese Students laugh loudly at Tim Geithner (The Telegraph, June 1, 2009)

Resurgent Russia Discharging Dollars (Goldseek, Trace Mayer, June 3, 2009)

China and Brazil: Dump the Dollar (BusinessWeek, May 19, 2009)

Merkel For the Fed (Wall Street Journal, June 4, 2009)