Jim Rogers: Long Agriculture, Short Bonds and… Soccer?

by Garrett Baldwin Wisdom of Wealth Wisdom of Wealth

Jim Rogers: Long Agriculture, Short Bonds and... Soccer?

by Garrett Baldwin, Executive Editor, Investment U

Tuesday, May 10, 2011: Issue #1509

"Jim Rogers?" my friend Paul asked. "As in... the Jim Rogers? What exactly do you do again?"

After I explained my new role at Investment U, I scribbled a few questions on the back of a napkin for an upcoming interview with legendary investor Jim Rogers. It's the first of many interviews that Investment U will be conducting over the coming months, as we sit down with some of the greatest minds in investing... It's an opportunity to ask where they're putting their money, what markets they're keeping their eyes on and what strategies make them successful.

And who better to start this series with than Jim Rogers?

Jim Rogers first made a name for himself at The Quantum Fund. He and partner George Soros founded the first true global investment fund in 1970. Over the next decade, Quantum gained 4,200 percent, while the Standard & Poor's 500 Index climbed by approximately 50 percent.

Since then, Rogers "retired" and traveled the world (multiple times). In the process, he's written several bestsellers, including Investment Biker and Bull in China. He sat down with us on May 1 to discuss his most recent book, A Gift to My Daughters, his views on the U.S. Treasury market, and the rise of Chinese capitalism...

And what did we learn? First, we learned that Jim Rogers, at 68 years old, does not slow down. Rogers chatted with us for more than an hour from the comfort of his exercise bike, huffing and puffing his outlook on the markets...

Jim Rogers: The Investment U Interview

In Part One of the Investment U interview, Jim discusses the primary influences for his recent book, the signals of a potential bubble in the commodities markets, and why the twenty-first century belongs to China...

Garrett Baldwin: The book is A Gift to My Children: A Father's Lessons for Life and Investing. Where did you find the time to write such a reflective piece on life and investing?

Jim Rogers: It was really just put together over a life, having made many mistakes and having a periodic few successes in my life. It took a lifetime to make all those mistakes and figure out how things work.

The book started when a Japanese reporter once asked me, "What are you teaching your daughter?" And she wrote an article explaining what I was teaching my daughter. She did that again and again.

The next thing you know, she had a dozen columns or so about things I had said. After reading those columns and reflecting on them, I started making it into a book. It was first published in Japan. The American version is much more extensive.

Garrett Baldwin: You start with the message: "Swim your own races." How has that lesson helped you, both as an investor and, as you put it in the book, "a citizen of the world?"

Jim Rogers: Well, I, probably like many other people, always assumed that [everybody] else knew more than I did, and so I would try to copy or mimic other people, or at least think about how other people were doing things.

But eventually I realized when I listened to someone who I thought knew what he's talking about, but I disagreed with him, it turned out that I was right and he was wrong. After that happens enough times, you start to realize, "Maybe I should listen to myself instead of [everyone else]." That gave me the insight and the confidence to swim my own race.

Garrett Baldwin: You state that the more ridiculous the investment idea, the better it is for the contrarian investor. So what seems ridiculous but also high potential on your radar?

Jim Rogers: Well, U.S. government bonds are awfully ridiculous. They have been for a while. It takes a while for a bubble to blow up. But [U.S. bonds seem] to be a bubble. Imagine lending money to the United States government in U.S. dollars for three or four or five or six percent. You pick the number because when a country goes bankrupt, eventually the interest rate goes to staggeringly high levels. And that's going to happen in the United States.

Another bubble I see is American tertiary education, but I don't know any way to short either Harvard or Stanford. English and European football teams are a bubble, but I don't really know any way to short those, either. There are always bubbles in the world, but the one that I'm planning to short next is the U.S. government bond market. The long-bond market.

Garrett Baldwin: Do you believe that QE3 and QE4 are inevitable?

Jim Rogers: I do think that they will stop QE2 just because they have so much publicity on the fact that they're going to stop it. But something will come back. They may call it something else. They may try to disguise it, but something is going to come back.

You're not going to see American politicians, especially in an election year, saying, "Well guys, we made horrible mistakes over the past 40 years. Now we have to pay the price and suffer." No, no. They're not going to have that kind of platform in 2012. So something will come along to replace QE2.

Jim Rogers on Bull Markets Ending in Bubbles or Hysteria

Garrett Baldwin: In the book, one of the key messages was, "Don't ignore the bear." So as a contrarian investor, if everyone becomes a commodities bull, at what point do you look at the market and become a bear? What are the signals?

Jim Rogers: Most long bull markets end in hysteria or in bubbles, and my expectation is that this one will, too. But when you say everybody is a bull, I mean, how many people do you know who buy wheat or zinc or even silver?

I was speaking at a conference not long ago and the moderator asked a group of 300 or 400 international fund managers, "How many of you ever owned gold?"

Seventy-six percent of them had never owned gold. And if you'd asked how many owned soy beans, God knows it would have been zero percent.

So when you say everybody's bullish, who are these people? Where are they? Maybe they're bullish, but there are very, very, very few people who have invested in a manner that reflects their bullishness. The last time I was in the United States, I saw shops everywhere saying, "We Buy Gold." The public's dumping their gold into these shops. Eventually, those shops are going to have signs outside saying, "We Sell Gold," and people will be lined up to buy gold. But those days are far from here yet.

So where are these bullish people? If they're bullish they're sure not putting their money to work.

Not yet anyway.

Garrett Baldwin: You said the short term is driven by emotion and the mid to long term is driven by the fundamentals. You sell during hysteria and you buy during a panic. How do you tell the difference between the ending stages of hysteria and the beginning stages of a panic?

Jim Rogers: Bubbles throughout history all look the same. It doesn't matter what the asset class or what country it took place. If you go back, you'll hear people say the same thing. They say, "It's different this time." Or there's this major new breakthrough, often in technology [that helps drive speculation]. You see many people investing who've never invested before. You see students and people leaving their jobs to go into the new holy ground whether it's gold in California or real estate in Texas or dot-com [companies] or stocks in Kuwait. They all look the same.

In America, we were told house prices would never go down. You heard the same things: "House prices can't go down. Stocks always go up." If you read about the bubbles in history, the same things are said, the same actions are taken, the same skyrocketing prices take place, same financing, new instruments, everything. It always happens. They always look the same.

And all you have to do is be able to keep your head and say, "Hey, I've seen this before." I always get out too soon because I cannot conceive how high things can go. I'm trying to learn that no matter how absurd things might look, they're going to get more absurd.

The Industrial Benefactors of The Potential Commodities Boom

Garrett Baldwin: So when you talk about this potential commodities boom, what industries in the United States would benefit, aside from the commodities producers themselves?

Jim Rogers: Everybody who has second homes in Iowa would be rich because all the farmers are going to be stunningly rich. You want to buy a lake house, buy it in Iowa or Oklahoma. Don't buy it in Massachusetts. You know, the stockbrokers are going to be broke. Buy where the people are going be rich. Open yourself a chain of restaurants in the agriculture area or department stores or hotels. Anything that you want to do in an area where people are making lots of money, you'll make a lot of money, too... just because they're rich.

Certainly, [look at] the seed manufacturers and the tractor manufacturers, backhoe dealers, everybody who has anything to do with production of raw materials is going to get rich. I don't know if you've been to North or South Dakota recently - they can't fill the jobs. There are massive numbers of jobs. The places are booming no matter what you want to do.

Go there. And if you have half your wits, you'll make a lot of money.

Garrett Baldwin: In your book, education is a core theme. You described education as the greatest influence on your life. And when you went to Oxford last year, you told students to forget about Wall Street and to go into mining and farming. What's happened in the last 20 to 30 years that's driving this sentiment?

Jim Rogers: Over the last 25 or 30 years, agriculture's been a horrible way to make money throughout the world. As a result, we have virtually no farmers.

According to the U.S. government, the average age of farmers in America is 58 years old. In 10 years, they're going to be 68 years old... if they're still alive. If you get out the Department of Education numbers for the past 50 years, you'll see a dramatic decline in the number of students studying agriculture, mining and petroleum engineering. All those things that you need in order to open mines, find oil, or produce wheat.

On the other hand, you find staggering increases in the number of people studying finance, business and MBAs. We don't have any new farmers. Second of all, the [experts] are pretty old and are going to be going out of business. It's a huge mess we have that's developing in the world, and you're going to see more and more shortages develop. We already have very low inventories on a historic basis for agricultural products. And even if we have a great local crop this year or next, so what? It's going to be consumed very quickly because the inventory levels are already so low.

Garrett Baldwin: We're not expecting our readers to begin toiling the earth... but what can they do to take part in this commodities boom?

Jim Rogers: You can buy farmland. You can buy agricultural products. You can buy stocks that will benefit if you're a good stock picker. You can invest in countries that will benefit. Canada is going to have a better economy than the United States. Australia is going to have a better economy than Belgium.

If you don't want to become a farmer, buy a mine or buy a farm, there are other ways to do it. You can buy currencies. The Canadian dollar is going to continue to do better than the U.S. dollar.

There are many ways to participate.

The 21st Century Belongs to China

Garrett Baldwin: You said in the book that the twenty-first century belongs to China. So how has your opinion of China changed in the past 20 to 25 years, both in terms of its economic potential and its political system?

Jim Rogers: I first went to China in 1984. I was scared to death when I went, having been filled with Western and American propaganda all my life. I soon realized it was not what they said when I arrived and traveled around.

In 1986, I went back and motorcycled around part of China. I realized that these guys were amazing capitalists. Capitalism was on the rise. Entrepreneurship was on the rise. So my view changed dramatically once I saw what was going on, and it sank in.

Then every time I have been back, my view has only been reinforced. I wouldn't say it's changed. It's been strengthened - the view that China is the next great country in the world.

Of course, I learned more about Chinese history in that time. I came to realize that China is the only country in the world that's had recurring periods of greatness. Great Britain was great once. Egypt was great once. Rome was great once.

But China's had three or four periods of astonishing greatness and success. They've also had three or four periods of catastrophe. But they're on the rise again. In my view, it's something that has happened before and will undoubtedly happen again.

As far as the political system, it has opened up enormously. When I first went, there was [only] one TV station, one radio, one newspaper, one everything. One way to dress. Everybody dressed the same way.

Well, that's changed unbelievably. Now there are hundreds of internet sources in China including periodicals and TV stations. The idea of having a demonstration in 1984 was preposterous. Now of course there are lots of demonstrations each month as people are demanding what they think are their rights. Their system has opened up a huge amount in that period of time.

There will continue to be setbacks, of course, mostly the economy, the political system in society, just as there were in the United States in the nineteenth century. In the United States in the nineteenth century, we had many depressions. We had a horrible civil war. We had riots and massacres in the streets periodically. We had no human rights. We had very little rule of law. In the nineteenth century in America you could buy and sell congressmen. Well, you can still buy and sell congressmen in America, but in those days, they were cheap. Now it's downright expensive to buy a congressman.

I presume somebody's gonna be the most important country in the twenty-first century. I don't see anybody on the horizon except China.

China's Rising Commodities Demand and Inflation Issues

Garrett Baldwin: In the short term, we're seeing some problems in China with rising commodities demand and inflation issues. Recently we've seen striking by truck drivers in China with high diesel costs. How do you think the Chinese government will handle this issue and try to stem off rising commodity prices?

Jim Rogers: Well, they do have an inflation problem. The world does. China may have it worse than other places because of the blocked currency. You know all that money's trapped in China so it cannot get out. So it's got to go into real estate or elsewhere. This makes the problem even worse. Every country has inflation, though. They may lie about the extent of it. The Chinese at least say it's there. And they're trying to do something about it.

They have raised interest rates several times. They've raised reserve requirements. They're trying to stop it. I hope they do. It would be good for the world, good for them, good for everybody.

Sure, it's causing dislocations. You saw the truckers being agitated. I don't know if [the government will] be able to handle the riots or not. We'll see. But whatever happens, assume the worst. Assume chaos rides in the street and the overthrow of government. They're not going to bring back Mao Tse-tung, I assure you.­­

I'm not sure the world would be better with these communists being thrown out. They've been awfully good capitalists, these guys who call themselves communists. China is going to have plenty of problems. Don't think they're not. Nothing goes straight up and China won't, either. When you see problems in China, I would urge you to do some reflection and some research. You'll probably pick up the phone and buy more in China.

Garrett Baldwin: In The Ultimate Investor's Road Trip, you were bullish on China. In your new book, you are bullish on Brazil and China, skeptical of India and bearish on Russia. Has that view changed at all on Russia?

Jim Rogers: No. I recently read how there were six or eight developing enclaves of power in the former Soviet Union. It's now broken up into many more. Vladimir Putin may say his people are running a section of the country, but nobody's running Russia except the Mafia warlords.

Whether they're called "Mafia" or something else, it's the same thing. If you're in bed with some of those guys or Putin in the areas he controls, you're gonna make a fortune. But you'd better be very careful. Like any other warlord, if they change their mind, you're going to be shot. If you're lucky, you're going to be shot. If you're unlucky, you're going to be tortured, jailed and bankrupted. So be careful. If you play that game, you'll get rich. Otherwise, you're going to suffer pretty badly.

This concludes Part One of the Jim Rogers Investment U interview. Check out Part Two, in which Jim explains the potential threats of the commodities boom, how to identify the next great emerging market, and why history is the most important school subject to the investor. Until then...

Good investing,

Garrett Baldwin

Read Part II here: Jim Rogers: Learn Your History... Commodity Producers Will Rule

Editor's Note: This two-part conversation with Jim Rogers centers on his experiences both as an investor and as, he defines it, a "citizen of the world."

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