Renée Schultes 23 May 2007
The commodities bull market has another decade to run, the legendary investor tells Financial News According to the Bible, there is nothing new under the Sun. As a piece of money-making advice, it has served Jim Rogers, investment guru and co-founder of the legendary Quantum Fund with George Soros, pretty well too.
The Alabama-born investor arrived on Wall Street in 1964, the year Lyndon Johnson trounced Barry Goldwater in the US presidential race, Ford made its first Mustang and The Beatles hit the top of the US pop charts for the first time. Since then he has been through dramatic bull runs and precipitous bear declines, seen investment fads come and go and has observed a generation of asset managers make ill-informed choices because they were unable to see the long-term picture.
Bullish on commodities, impressed by – if wary of – China, bearish on the US: Rogers can draw upon nearly five decades of experience to support his views. Of the current upswing in the market, for example, he reckons: “plenty of managers haven’t got it right. People don’t understand what happens in bull markets. You’re going to have some big reversals and changes and a continued explosion in the price of commodities.”
Rogers had his first taste of the power money brings in the swinging Sixties, but it was a meeting in 1970 that helped seal his reputation. That year he joined international investment firm Arnhold & S Bleichroeder, where he met an up and coming manager named George Soros. They later founded the Quantum Fund, which went on to deliver an investment return of 3,365% during the 1970s. Over the same period, the Dow Jones Industrial Average index returned 20%.
It was a golden era for the hedge fund industry. Rogers spent his time poring over historical charts of commodity prices and currency exchange rates to learn about the ebb and flow of financial markets.
Although he parted company from Soros and stopped managing money for clients in 1980, he has continued to invest for himself and completed two round-the-world trips. In 1998 he launched the Rogers International Commodities Index, which coincided with the beginning of a bull market in commodities that he reckons has another decade to run. It has so far gained more than 250%.
That five decades of experience has led to an investment mantra based on watching history repeat itself – although not often in the most predictable way – through different market cycles. He pointed to gold, which rose 600% in the 1970s and then went down nearly every month for two years. “Most people gave up but then it went up another 850%. That’s what happens in bull markets,” he said.
Rogers also believes the rise of China, the most important country of the 21st century, will propel the commodities bull market for another decade. He first visited China in 1984, when the first tranche of corporate equity was issued, as the economic reforms of the then leader Deng Xiaoping took a grip of the country. Twenty-three years later, China’s stock market has a market capitalisation of more than a trillion dollars and has been gradually opening up to foreigners, although it continues to be dominated by domestic investors.
Rogers’ commitment to China is clear. His four-year-old daughter learns Mandarin from her Chinese nanny and, if Financial News would buy his New York home, he would happily move to China tomorrow, he quipped.
But the market is not for the faint-hearted. Like others, he is wary of a bubble forming: the Shanghai stock market is up 48% this year. He worries that domestic investors are borrowing too heavily against their homes and cars, to invest in stocks, and about how loud the chatter in Shanghai brokerage houses has become. “It is getting to be a bit of a mess,” he conceded and, if the stock market doubles again, he will force himself to sell. “But I won’t want to.”
Unlike many of his peers, Rogers is not betting on the affluence of Chinese consumers who, he believes, are too exposed to a recession. He prefers stocks in airlines, companies that service the agriculture industry and power generators.
“I know tourism in China is going to continue to grow even if there is a recession. I also know the Government is pouring its efforts into agriculture. I want to invest in things that are immune from recession,” he said.
He owns shares in Japan because it has a current account surplus with China. But he believes the best way to play China is through commodities, because it is dependent on them. He points to nickel, which has risen by almost 300% since the beginning of last year. It is used in many industrial and consumer products, including stainless steel, magnets, coins and special alloys, and which China must import from countries such as Russia and Canada.
“Right now people in Asia are speculating on nickel by buying stainless steel, a lot of which is being stockpiled because as the nickel price rises, the price of stainless steel rises. That’s madness and not a good sign for any market,” he claimed.
Metals are less interesting to him, although he stresses that he would never be short on a commodity in a bull market. He is more intrigued by what is happening in soft commodities, such as sugar, cotton and coffee.
“I’m the world’s worst market timer but I think sugar is one place you should be looking. Comparing nickel or sugar, I’d be doing my homework on sugar,” he added.
Sugar prices have fallen from 16.61 cents/lb last July to about 9 cents/lb and investors are betting on it falling further. Its price has been declining because of a widening gulf between production and demand, which the London-based International Sugar Organization, estimates will be as high as 7.1 million tonnes by the end of September.
Wheat is another commodity worth backing, Rogers believes, because the amount of land dedicated to wheat farming is in decline and inventories of food stocks are at their lowest since 1972.
“We haven’t had any bad droughts worldwide in the last 20 years. If the price of wheat triples, more people are going to plant it, but they are marginal hectares so it does not mean they are going to double the amount of wheat coming to market,” he said.
He is sceptical that the use of biofuels made from corn and sugar will become mainstream and predicted oil will hit $100 a barrel within a decade.
Ethanol will not solve the world’s energy problems, he said. “In fact, it might make them worse. To produce a litre of fuel from corn requires more energy than it produces. Even the most positive research has found that making it uses 75% of the energy it produces. Corn needs land on which to grow, so the price of everything else goes up and we are in an inflationary spiral. Biofuels cause many unintended consequences people haven’t thought about.”
But Rogers was most bearish on the US, where he is short on government bonds. He believes the US dollar is heading the way of the Dutch guilder and Spanish peso, both once the world’s reserve currencies. He is concerned about record levels of liquidity and the willingness of the US Federal Reserve to continue to print money.
“There’s too much liquidity and I would have thought the world’s central banks should have recognised this by now,” he said.
The yen-financed carry trade, where investors borrow in the low-yielding currencies to invest in those with higher yields, is worrying, he adds. And he disagrees with many of his peers who think the fallout from a sharply appreciating yen will not be as severe as in 1998.
“When the carry trade unwinds, the yen is going to go straight through the roof. I’d buy yen because, when it reverses, it’s going to be a gigantic panic to reverse the position.
“And this isn’t any different to 1998, either. The fact capital markets are so developed, means it is likely be worse this time,” he said.
40 years of investment wisdom from Jim Rogers
"Get inside information from the President and you will probably lose half your money.
If you get it from the chairman of the board, you will lose all your money.
Get out of the dollar, teach your children Chinese and buy as many commodities as you can.
I’ll sell when Merrill Lynch has commodity brokers in every office again and the TV networks are broadcasting from the soybean pits in Chicago.
You get your information from the Russian Government and the World Bank!? Are you mad?
Sometimes I wonder if our central bank is just going to print money until we run out of trees."
http://www.financialnews-us.com/?page=ushome&contentid=2447875112&printview=true
