Jim Rogers BBC Interview - 26 August 2011

Interview transcript:

Jim Rogers: I hope it's only one decade of loss that we lose in America. Japan has had two lost decades now, as you probably know, and America is in much, much, much worse shape than Japan.

America is the largest debtor nation not just in the world, Justin, in the history of the world. We have serious problems. They are not addressing the problems in America. So I hope it's only one or two decades we lose. It may be three or four.

Justin Rowlatt: So what do American politicians need to do?

Jim Rogers: First they need to get a little education about the rest of the world and about their own economic situation and then we have to change our tax code dramatically. We have to cut spending with a chainsaw; not with an axe, with a chainsaw.

We got troops stationed in over 120 countries around the world. I mean the politicians have sent them there you know, and those military establishments are making things worse for America, not better. We got to change our total way of thinking just as the British did when the British started facing reality.

Justin Rowlatt: When you say face reality, you seem to be suggesting that the age of American supremacy is over?

Jim Rogers: Absolutely, aren't you? Listen to the BBC and you will hear what's going on in the world. The 19th century was the century of the UK, the 20th century was the century of the US, the 21st century is the century of China, of Asia, Justin.

I mean, here is a simple fact. The largest creditor nations in the world now, Justin, are China, Korea, Japan, Taiwan, Hong Kong, Singapore. Those are all Asian countries. This is where the assets are. This is where the energy is, the dynamism is. You know who the debtors are and where they are.

Justin Rowlatt: I mean the Chinese economy, for example, just to take one Asian economy, isn't looking so healthy itself, is it? I mean, yes, it's still growing, but there are these real concerns about inflationary pressures within the economy, which could derail Chinese growth, couldn't they?

Jim Rogers: Extremely insightful of you. Yes, China has got some problems and they will continue to have problems. Fortunately, they realised the problem. They are trying to cut back on the inflation.

They have made some mistakes too. They should have opened their currency to make it a convertible currency. The fact that it's not convertible and all that money trapped in China is just adding to the inflation. So yeah, they are making mistakes too. Still, I'd rather be with the creditors than with the debtors any day.

Justin Rowlatt: I suppose what I am suggesting is that you look at America, you look at Europe, you even look at China and India, the two great Asian behemoths, and you see problems across the world economy. Are we entering now a period of slow growth globally?

Jim Rogers: Oh, yes. Yes, yes, absolutely. If that's what you meant, there is no question about that. You just pointed out that China has got its own problems, but this is the way the world has always worked. We have gone through long periods when things were great followed by long periods when things slowed down for a while and we cleaned up mistakes of the past.

Justin Rowlatt: So you think we are entering one of these cyclical periods of slow growth worldwide?

Jim Rogers: Unless you know something I don't know, yes, absolutely. The only areas of the world economy I see that are going to be dynamic are natural resources; farming is going to be one of the best professions of the next 10 or 20 or 30 years.

Justin Rowlatt: You seem very sanguine about it, but you don't seem very worried by it?

Jim Rogers: No, not at all. The world has been going through big changes like this throughout history. In the '20s and '30s, the world moved from the UK to America exacerbated by a financial crisis and mistakes made by politicians.

The world is going through a historic shift again from the US to Asia exacerbated by a financial crisis and mistakes made by politicians. Justin, the world has been going on for a few thousand years and there have always been big changes and adjustments.

At some times in history, the financials types have been in charge; at other times in history the people who produced real goods have been in charge. It's the way the world has always worked. The key of course is to figure out what's coming next and go there. Become a Chinese farmer, that's what you should do, Justin.

Justin Rowlatt: You say farming, why do you think farming will be such a crucial sector in the next couple of decades?

Jim Rogers: Farming has been a disaster for 30 years, Justin. The average age of farmers in America is 58 because it's been such a horrible business. The average age of farmers in Japan is 66. In Australia, it's 58. I could go on and on. In 10 years, those farmers are going to be 68 if they are still alive.

Justin, we have huge shortages developing in agriculture and great fortunes are going to be made by the people who address those problems.

Justin Rowlatt: And commodities is the other sector you said we should look up. Now hold on a second. If the world economy is entering a period of slow growth that you think is going to last not one decade but a number of decades, why on earth would you put your money in commodities?

Jim Rogers: Because you asked where the best areas of the world economy are going to be, that's where the shortages are developing. In the 1970s, most of the world's economies were in the tank, but commodities boomed.

Justin, we had one of the great world markets of history in commodities for about 15, 20 years in the '70s, between the '60s and the early '80s in commodities, because we had huge shortages everywhere and because governments everywhere printed money.

Well, governments are printing money again. It's a wrong thing to do Justin, but that's all they know to do. So between shortages of supply and money printing, if you want to be in the dynamic parts of the world economy, don't get an MBA and go to Wall Street, go and get a farming degree and move to Asia.

The case for Gold Miners vs Gold

Gold has been on a roll for many years but has especially gone up in a parabolic manner recently even though the expected correction seems now underway, actually a bit earlier than initially expected.

Gold miners have also gone up, but in no way as fast as the gold itself, as you can see from the 5-year chart below with SPDR Gold Trust (GLD) in Green , Market Vectors Gold Miners ETF (GDX) in Blue and AMEX GOLD BUGS INDEX (^HUI ) - the underlying tracked by GDX - in Red (Source: Yahoo Finance)


As you can see gold itself has clearly outperformed gold stocks in the last 5 years. Another important thing is that GDX tracks the HUI index pretty well. Whether an ETF can properly tracked the underlying index should be always be checked before investing in an ETF as some ETFs are poorly constructed and only designed to make money for their manager(s) or short term traders.

We can look back in history with the BMGI (Barron Gold Mining Index) to Gold price ratio and clearly see that relative to the price of Gold, Gold mining shares are historically still very cheap as you can see on the chart below (Source: 321gold.com).


This chart only shows the ratio until Q1 2010. In August 2011, the BMGI stands at 1394 and the Gold Price is around 1750 USD, so the ratio is around 0.80 which is close to historical lows (around the lower red line).

However, you can also notice that in early 80s, the ratio was also very low during the gold spike. That means that during the 1980 Gold bubble, Gold miners stocks did not go up as fast as gold either.

To conclude, if the current Gold bull market is not over, it could be a very good time to buy gold miner stocks. But if the Gold bull market is over, gold miners could still lose value albeit less than gold bullion.

Marc Faber: Stock Market Rally Could Last Longer

Marc Faber is interviewed by Bloomberg on the 23rd of August 2011.

He said that due to technical the current rally could carry on for a while.

He also said that both extra bear and bull are likely to be disappointed, as we are not likely to revisit the May 2011 highs nor test the lows of March 2009.

Finally, he discusses about what he expects from the Federal Reserve meeting in Jackson Hole later this week.

Will US Stocks stay in a Bear Market until 2014 ?

The answer could be yes according to a paper by FRBSF entitled "Boomer Retirement: Headwinds for U.S. Equity Markets?" where they compared price earning ratio in relation to demographics.

The first chart (above) compared the inflation adjusted P/E ratio of the S&P 500 to the M/O ratio. The M/O ratio is the ratio of the middle-age cohort, age 40–49, to the old-age cohort, age 60–69. As we can see the two seems correlated.

The second chart is where it becomes to be very interesting. Based on expected demographic trends (usually quite predictable), they created a model to see what the P/E ratio would look like in the years ahead. As we can see on the cahrt above, the P/E ratio is expected to bottom out around 2024 according to their model. That would mean another 13 years of bear market for the S&P 500.

This is also in accordance with Schiller's 10-year inflation adjusted P/E chart, where it shows bear market usually end with P/E below 10, except it does not provide timing.

Where is Gold headed in the Short Term ?

Gold has broken the trend its started in 2008 on the upside in recent weeks as shown in the chart below (Gold in USD, source: Boursorama.com)
Gold has now started a parabolic move, and is headed towards 2000 USD per ounce. This remind me of the run-up in Silver earlier this year, where Silver reached 50 USD per ounce before severely correcting. It has since then somewhat recovered.

Although I still think that in the long term, Gold is headed much higher until we get positive real interest rates and debt issues are resolved, in the short term, Gold could reach a psychological level such as 2000 USD and then correct somewhat (10% to 20%) before moving up again.

2000 USD (or just above) also corresponds to the top line of the trend started in 2001 (See chart below. Source: Boursorama). Please note that it is a logarithmic chart as such scale is better suited for longer periods of time.



Right now, it's difficult to see what could trigger a sell-off in gold. The recent margin requirement hike did not put much downward pressure on gold. On the 25-26 August 2011 (This week), the federal reserve will meet at Jackson Hole and many people expect them to announce QE3 (explicitly or in disguise) at that time. If it does not happen, and the FED clearly waits and sees, we could see a short term correction in Gold as QE3 (or equivalent) will eventually be implemented.

Marc Faber: Buy Stocks over Treasuries

Interview of Marc Faber on Bloomberg on the 19th of August 2011.

Dr Faber discusses whether the treasuries are in a bubble and when it could pop.

Marc Faber also explains that he believe the bear market has just started due to technicals, but if he was given no choice he would still buy stocks instead of long dated treasuries for the long term. He thinks it will be incredibly difficult to reach new highs above 1370 on the S&P.

Finally, he still expect gold to perform well in the long term (although it is above the trend line in the long term) and does not see a huge drop potential as with any drop of 150 dollars, there would be many dollars.

5 Investment Ideas by Marc Faber

Marc Faber has been interviewed by MarketWatch where he recommended 5 money moves:

1. Avoid Treasuries (10-year and 30-year)
   
2. Cash is trash
3. Stocks provide some safety
4. Emerging markets will expand over the long term
5. Hold gold to preserve wealth.
   

Read the full interview on MarketWatch.

Mike Maloney: The Case For $20,000 Gold

Great video presentation by Mike Maloney that any long term investor should watch.

In this 90 minute presentation he lays down his 'most likely' scenario for the global economy over the next decade: short term deflation, followed by big or even hyperinflation. Here you will learn the true definitions of inflation/deflation, the difference between currency and money, price vs value, Wealth Cycles, gold and silver accounting for the expansion of fiat currency, gold and silver supply and demand, the differences between the today's bull market and that of the 1970s, The Debt Collapse, and more.

How to short US treasuries

Many investors such as Marc Faber and Jim Rogers think the long dated treasuries (e.g. 30 Year Treasuries) are in a massive bubble and have started to short them, although some "deflationists" such as Mish Shedlock do not think the treasuries bull market are ended.

For most people, it is not possible to short treasuries directly (I can't), however it is possible to make use of the following short ETFs to do so:

• ProShares UltraShort 20+ Year Treasury (TBT)
• Direxion Daily 20+ Yr Trsy Bear 3X Shrs (TMV)

As with all short ETFs, and especially leveraged ETF such as TMV (3X) and TBT (2X), we'd better check the chart history and compare those ETFs with the 30 Year Treasuries Yields to check how bad is the decay.

First let's have a look at TBT vs 30 Year Treasury Yields (^TYX) for the 3 year period between August 2008 to August 2011 (Source Yahoo Finance):

We can see that the 30 year treasury yield fell by 20% during that period but TBT managed to fall 60% during the same time frame. Also note that 30 years treasury yields reached a low on December 2008 and have not tested this low yet, whereas TBT has.

Now let's do the same with TMV over 2 years. TBT chart is also included for reference (Green).

TMV is leveraged (3X), and as 30 years treasury yields fell 20% over two years, TMV fell by 60% which seem to match its mandate with TBT falling by 50%. However, when we check the chart more closely, we can see that when the treasury yields go up, TMV does not go up 3X over the long term, it just basically follows TBT.

To conclude both TBT and TMV can be used a trading instruments, but they would be terrible investments over the long term and should not be used to short treasuries during long time period. I would only consider investing in those products in case of treasuries buying panic, where yields go down precipitously over a short period of time.

Japanese Yen Back to Highs Despite Intervention

Do you remember the spectacular intervention of the BOJ on the currency markets on the 4th of August ? Well that "worked" only one week, as we are back to the end of July highs.
That shows fighting the markets is futile (even for central banks), at least in the currency markets.

Jim Rogers: This is the 70s Again

Jim Rogers is interviewed on Newsmax.tv on the 9th of August 2011.

He discusses the fiscal situation in the US, whether we are entering a new recession or we are in a depression. He also complains about all the mistakes the federal reserve has done by bailing people out.

If the market collapses further, he would cover his shorts and consider buying real assets (commodities). He expects Bernanke to print more money (but probably not call it quantitative easing) and that will lead to some real problems.

He's worried that gold went up too fast, expects a short term correction but does not plan to sell its gold and silver holdings.

Crude Oil may go down further, but if he does he'll buy more although he believes agricultural commodities should perform better.

He also explains his views on treasuries that he does not consider as a safe heaven and he's even shorting them.

Then they discuss the Chinese economy, where policy maker are trying to cool down the economy and reign in inflation (contrary to the US).

Finally, they talk about the US credit ratings, and he does not expect the US to get its AAA rating back during his life time and see more downgrades coming.

Jeremy's Grantham Quarterly Newsletter August 2011 Summary (Part 2)

Jerey Granthan from GMO has just released the second part of its Quarterly Newsletters entitled "Danger Children at Play".

He shortly talks about the debt ceiling debacle and how developed economies are can-kicking, but then focuses on his "Seven lean years" prediction of 2009 where he saw weak growth of 2% per year, and analysis the positives and negatives as of today.

Positives:

• Economic growth rates in emerging economy
• US / China Trade Surplus/Deficit has shrunk
• US Personal savings are up
• Corporate profits

Negatives:

• Disillusionment with Institutions, especially congress.
• Commodities price are higher than expected
• Balanced budgets now impossible without reducing spending or increasing tax or both
• Housing bust overhang to remain for years
• Modest personal income progress and large income disparities between the rich and the middle class in the US. (US Real Average Hourly Earnings Index is down over 40 years)
• Individuals must pay down existing debt
• Retirement plans (e.g. 401k) are not as good as defined pension funds
• Terrible economic policies stuck because Keynesian stimulus and Austrian cut-backs
• Risk of the US declining like the UK did in the past

He then moves on to focus on corporate profits that are so high that they seem completely disconnected from economic reality. Those profits are likely due to government spending and when it stops you can expect profits to tumble.

In his Q2 newsletter, he predicted a market correction because of Libya, Japan and high commodities price, and still recommend to keep your head down until we reach fair value (S&P to 950) and hold shares of high quality companies.

Finally, he makes some buying recommendations:

• Managed farmland and forestry
• Commodities such as hydrocarbons, metals and fertilizer over a 10 year horizon. However, since there have gone up substantially over the last few years, waiting for a pullback maybe safer
• Quality Stocks
• Emerging markets
• Japanese Stocks

To conclude, he warns that historically markets usually become cheap and stay that way for many years and that we should not normally expect any bounce when the markets reach fair value and that GMO is starting to be cautious buyer (the first time since mid 2009) at those levels with a portfolio composed of US high quality, Japan, Italy and European growth stocks

Marc Faber August 2011: All Members of the FED Should Resign Collectively

Marc Faber discusses the FED decision, Treasury Market and Gold on Bloomberg (9 August 2001).

He explains that he's glad that they (The Federal Reserve) did not offer further stimulus, but only specified low rates until 2013.

He would still short treasuries and he's amazed people are still piling onto them comparing it to the bubbles of the Nikkei,the Nasdaq and the recent Housing bubble.

He does not think Gold is a bubble, but it has gone up high to fast and a correction should be expected. He also stresses that every responsible adult should accumulate Gold every month and complain about Bloomberg employees who do not buy Gold even though they are intelligent persons :).

On the stock market, he would use any rebound as a selling opportunity and after further correction move money back into emerging economies.

Physical ETF vs Synthetic ETF

The Hong Kong Exchanges and Clearing Limited provides a List of ETFs and Trading Arrangements of ETFs (Excel Format) that can be purchased on the Hong Kong stock market.

However, I noticed that they classified the ETFs in two categories:

• Physical ETFs
• Synthetic ETFs

So what's the differences between the two and the advantages and inconveniences of those types of ETF.

A Physical ETF simply owns the entities of an Index. For example, a physical ETF tracking the CAC 40 would simply hold shares of all 40 companies listed in this Index. The main advantage is that there is no counter-party risk, but should have to subtract cost and other inefficiencies to the ETF returns.

A Synthetic ETF is composed of total return swaps (financial derivatives) where a counter-party pays the exact return of the Index. Such products provides better returns since they allow to reduce the cost (reduce tracking errors) compared to the cost of physical ETF but they entail counter-party risk.

The diagram below explains how a Synthetic ETF actually works (Source: Moneyvator blog).

I recommend you read the following blog post if you need further details about Synthetic ETFs, especially to better understand the counter-party risks and understand what may happen if the swap provider goes bankrupt.

Marc Faber: The Market is Extremely Oversold.

Marc Faber talks about the recent market sell-off on CNBC on the 5th of August 2011 .
He thinks it is very unlikely that we reach new highs and he would be using rebounds has a selling opportunity whether Q3 is enacted or not.

He says Treasuries has still perceived as a safe heaven. His view is that gold and silver are overbought in the short term, but would buy again on any dips.

He also explains again his prediction of the total collapse of the economic system further down the road where cash and treasuries will be worthless, stocks will go down but still hold some value and precious metals should perform relatively well.

Is the Stock Market fall over ?

I'll base my assessment of the same criteria I used in my previous blog post "Bearish Sign: Extreme Bullishness for US stock market" published on the 7th of April 2011.

Since that time, Investor Intelligence does not freely publish its Bull/Bear Ratio and you have to be a paying member to access this information (which I'm not). However, I found a study published on the 31st of July 2011 that makes use of this data (Up to 26 July).
So on the 26th of July, the bull bear ratio was around 2.3. It has certainly dropped below 2 since then considering the sharp decline in the S&P 500. But we can't really that to make a decision.

The 14-day Relative Strength Index (RSI) for the S&P 500 is about 24 , which is usually a sign of an oversold market at least in the short time.. However, notice that the S&P 500 (below) has broken the bullish trends it started in March 2009.

Finally, let's have a look on the percentage of stocks above their 200-day moving average.


23 percent of stocks are now above the 200 MA, this is a level not seen since the market crash of 2008, and could indicate stocks have not much further to drop.

To conclude, if you believe that central banks will come to the rescue (say Q3) if the market falls further (as Marc Faber does), this may be a pretty good time to buy stocks (in the US or abroad) or add to your positions. However, if they wait and see, the market could fall much more (before it goes up again) especially if advanced economies falls into recession or the long awaited slowdown of the Chinese economy materializes.

Marc Faber: Fire half of the US government including the president

Marc Faber discusses about the US government, China, commodities, emerging markets and his view on the gold price on CNBC on the 2nd of August 2011.

He says a China's slowdown is a more serious risk to the global economy than a slowdown or recession in the US as the US is no longer a major commodities buyer. His views on Gold is that is we compare the level of government debt in the 90s and now, they have increase by 10 times, but the price of gold has not increase that much during the period.

Long Term Charts of the Thai Stock Market (SET)

This article showing the long term charts of the SET Index, price earning ratio and price to book value was originally posted on CNX Translation Forum.

The chart below is the SET index between 1975 and August 2011, it has continued to rise albeit at a slower pace.
However, the PER was stable around 15 as the companies earning improved. A PER of 15 is relatively high for the Thai stock market.


The price to book value of the SET index increased slightly to 2.14 (from 2) back to 2007 levels and not really historically cheap.


Finally, the average dividend yield is now 3.45%, but you can get the same amount of interest in a fixed deposit in Bangkok Bank (3.5% per year for 3 year fixed deposit).

To conclude, for those who are invested in the Thai SET is may be wise to further lighten your positions given the current market valuations.