Interview with Jim Rogers

Fusion: I just finished reading your new book Street Smarts, and I wish I had the book when I first started in the industry in the 90’s. It provides a great trading lesson of doing your own research – and not going with the crowd.  You point out in the early 70’s nobody liked energy and defense stocks. But you did your work and realized that both sectors were ripe for fundamental positive changes. When you told people you liked them, many were skeptical and said you were crazy. We know how that turned out.

Rogers: Shouldn’t follow the crowd – I’m sure you know that by now !

Fusion: China’s growth is slowing down, and many believe the reported numbers are overstating the actual growth. Wall Street has turned bearish on China and has cut GDP estimates. They are saying China cannot stimulate due to its property bubble. What are your current thoughts on China?

Rogers: I don’t trust numbers from any government, as most are made up, as you probably know. China has had astonishing growth, but they have problems with housing and inflation. We had the same problems in the 19th century when we were growing rapidly. Every country that rises rapidly has problems. China can see a recession, but the US saw recessions and 13 depressions in the 19th century, and was still the greatest nation in the 20th century. They are trying to slow down, which is the right thing to do. It’s natural they slow down from these growth rates. They are preparing the economy for long term sustainable growth.  The only way the China story runs into big problems is if they run out of water. China has a major water problem. They are working hard to solve it. I believe they will solve it. If you want to make a lot of money find companies that are working to fix that problem. As for their stock market, it’s getting closer to a buy. I bought a few shares on Friday. Their market is getting to the point it should be bought.

Fusion: Is their housing bubble worse due to the currency being blocked ?

Rogers: Good insight. It’s trapped. One of the few things I disagree with on China is their having a blocked currency. It creates imbalances, like you see in housing, as people need to put their money somewhere.  China has made strides in recent years to open up their currency and they will continue to do so.

Fusion: You have warned for some time that governments and central banks are refusing to make the tough decisions, having chosen instead to print their way out of problems. That leads to deteriorating national finances and sovereign debt issues that could lead to a rise in interest rates. The bulls counter that central banks can keep interest rates down through infinite bond buying, and expanding their balance sheets. What are the consequences to the ever-expanding balance sheets of central banks ?

Rogers: Yes. Mr. Bernanke believes you can expand the central bank balance sheet infinitely, and suffer no ill effects. Anything you do to diminish demand for the thing will cause the price to drop. Same thing here. Bond prices will drop, which causes interest rates to rise.  We are in a global bond bubble. When it pops is anyone’s guess. I have tried to short bonds a few times. The French tried money printing in the 50’s, the Italians in the ‘60s. At some point, the market won’t take it, and bond prices will go down and rates will rise. We have more money than Bernanke and the central banks do. So at some point this will happen.

Fusion: Over the last six weeks, the action in the emerging markets fixed income market has been scary. Many believe this started when the Fed hinted at tapering QE. Up until now, the Fed’s ZIRP and infinite QE policies have investors chasing higher overseas yields.  But that seems to be reversing, and liquidity is coming out of emerging markets the last 4 weeks. What is your take on this ?

Rogers: As I said, bond markets worldwide are in a bubble for the reasons you just stated. Bubbles can go on and on. Hard to tell when it pops. But at some point markets won’t take central bank policies anymore, and interest rates go up regardless of how much bond buying they do. Market timing is tough. As for the fix income market, I’m short  junk bonds. In any market, the marginal stuff goes first. This could precede problems with sovereign debt.

Fusion: When the bond market starts to collapse and rates rise, what happens to gold? You did call for a correction last year when it was a lot higher.

Rogers: It’s gone up 12 years in a row. I don’t know of any asset that goes up 12 years in a row. So just from a technical point of view, maybe it needs to go down some more. But from a fundamental point of view it will be a buy. There are some short-term factors hurting gold. The Indians are trying to restrict the purchase of gold, as it’s the source (along with oil) of their trade deficit. I have not sold my gold and plan to buy more if it keeps dropping. And yes, I did call for a correction a while back, and sometimes I do get it right !

Fusion: Many believe the US shale revolution is going to solve our energy problems? Is it over-hyped ?

Rogers: Yes, I believe it is.  Regarding natural gas, the fundamentals on the ground are not nearly as good as the hype. The number of rigs on the ground has gone down 75% the last couple of years, as the wells are very short-lived, and it takes an enormous amount of money to keep them up. A number of companies have had to lower estimates of their reserves. As for oil shale, typical wells deplete at 38 percent the first year. Thus you need a lot of drilling, money, and a high price to keep up production rates.  All you have to do is go out in the oil patch. I believe the investment world will be disappointed with the notion that supply is so great that oil will collapse.

Fusion: As for other commodities, are there any you see as a buy ? IWe know you like agriculture.

Rogers: Before we talk agriculture, I would look at natural gas, as any commodity that has that big a collapse should be looked at.  Agriculture is a great long-term story. We have been consuming more than we’re producing over the last 10 years, so the inventories are near historic lows. Agriculture has been a terrible business for many years. We’re running out of farmers. The average age of farmers is 58 in the US, 66 in Japan. Young people are not going into the ag business. Unless something dramatic happens, we will have a crisis, as we need people to go into the fields to produce this stuff. Everything cannot happen with automation.

Fusion: What about Ag productivity ?

Rogers: Most of Asia is not productive. Mao ruined China’s agriculture with his polices. India should be productive, but they have absurd regulations, as they restrict the size of farms. These are terrible policies, and make it very tough on farmers to make money. The suicide rate of Indian farmers has risen dramatically over the last few years.

Fusion: Any thoughts on cotton ?

Rogers: Cotton is doing well because farmers planted less last year as corn and grain prices spiked. It’s simple supply and demand.

Fusion: How does it end in Japan – in tears ?

Rogers: Of course it does. Japan has a very serious problem. When we look back, Mr. Abe will have ruined Japan. Huge debt levels, horrible demographics, they won’t let in foreigners, the population is declining. Mr. Abe comes along and says he’ll ruin the currency. It is a disaster in the long term, and not guaranteed to work in the short term, either.

Fusion: Will PIIGS nations have to leave the Euro in order to devalue their currencies and improve their competitiveness ?

Rogers: The Euro will look very different in a number of years. Devaluing is a temporary solution. Europe has been doing that for decades with no success. They can continue to do what they’ve been doing, but they’ll get poorer and poorer. Only real structural change to improve their economies will work. I do not blame the hard working Germans for not wanting to keep bailing out the wine sipping, beach loving Spaniards, Italians and Greeks.

Fusion: How much of the sovereign debt can the ECB own, if others don’t want to buy it ?

Rogers: You can play this game for a while, but eventually the currency collapses and the market won’t take it anymore. Again, the markets have more money than the central banks do.

Fusion: Will China suffer due the problems in the West and with Japan ?

Rogers: China is the largest creditor nation in the world, they save a lot of money, and they’re building their internal economy. They are in better shape than the others. Of course, they will have problems if the rest of the world has problems, as they did during the financial crisis. US and Europe are two big end markets.  But I would rather be a creditor than debtor in these situations.

Fusion: Druckenmiller is warning about a rise in US rates, due to uncontrollable entitlements here in the US. Will China reduce their holdings of US Treasuries? What is your take ?

Rogers: If you keep giving stuff away, your debt goes higher and higher, and there is no one to pay the debt. The US is the largest debtor nation in the history of the world. Only half pay taxes – this is an absurd situation.  All the debt is in the west while all the credit is in the east. Regarding China, yes, I wish they had already started reducing their exposure to Treasuries.

Fusion: Bright spots ?  Is Singapore moving in the right direction ?

Rogers: I hope so, as I moved here. Singapore is doing a good job. Income taxes are low, incentives to save are high, savings rates are high, and they do their best to attract capital and labor. There is a bit of a backlash now, with some of the problems immigrants are bringing here, but that has happened to all nations at some point in history. Overall, Singapore is doing well. Singapore is becoming the new Switzerland as its sits right next to China and has been helped by problems with offshore havens like Switzerland and Cyprus. It will be the fastest growing money center in the next 10 years.

Thanks for a great interview.