Jim Rogers

Jim Rogers is one of the most respected investors in the world. I had a chance to chat with him the other morning to get more details about some of his recent comments in the media …

Damien Hoffman: Jim, you were in the media a few times last week and I want to follow up on a few points you made. You said on Bloomberg that Nouriel Roubini did not do his homework regarding the asset bubbles about which he is now warning. Can you explain what homework he did not do?

Jim: All of it. How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.

A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.

I am flabbergasted at Mr. Roubini’s comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. That’s hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.

If an asset rises 100% in one year, that’s a great year, but not necessarily a bubble. Look at oil. It’s up huge off the bottom but nowhere near it’s old highs. Look at Citigroup. The stock is up 3 or so times off the bottom …

Damien: … and I doubt long term shareholders feel like they are in a bubble.

Jim: Exactly. And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) — which has the best global data set on energy supplies — has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us don’t.

Damien: On another note, Gold has been reaching new all-time highs, although not inflation adjusted. You said Gold may reach $2,000 an ounce over the next decade. Can you explain what variables will push Gold to $2,000?

Jim: First, I hope you will keep Mr. Roubini’s statement where he said Gold going to $2,000 an ounce by 2019 is “utter nonsense.” I think you’re going to get a chance to call him before 2019 to ask him what he thinks of Gold at $2,000 and why he thought it was “utter nonsense.”

Regarding variables, it’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it.

Additionally, no new large gold mines have been opened in decades. Some of those mines are over 100-years old. They are all depleting. On the other hand, central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.

If you adjust Gold for inflation and go back to it’s former all-time high in 1980, Gold should be over $2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs. That does not mean Gold has to get back to a true all-time high. Nothing has to. However, I suspect that given all the money printing in the world, we will see much higher prices for hard assets.

Despite Gold’s potential, I think I will make more money in other commodities such as silver, cotton, or coffee — all of which are terribly depressed.

Damien: Speaking of other assets, as an outsider living abroad, what is your opinion on US Equities?

Jim: This is one of the few times in my life I have not had shorts anywhere in the world. I have also not had a lot of longs in the stock market because I’ve chosen longs in commodities and currencies. I have kept away from shorts because there is a gigantic amount of money being printed and it has to go somewhere. I thought some of it would end up in the stock market, and it has.

How much higher can the equity markets go? I don’t know. There are a lot of problems in the economy, but I don’t know when those problems will cause a downdraft in the stock market. All we’ve done is paper over the problem, so I expect we’ll have to deal with those issues in the future. Printing and spending money we don’t have simply prolongs the problems and makes them worse in the long run.

If the world economy improves, commodities will lead the way due to demand and shortages. If the world economy does not get better, commodities are still a great place to be because governments are printing so much money. And, if the world economy doesn’t get better, they will print even more money!

Damien: Jim, thank you for taking the time to share your outlook and opinions. I greatly appreciate it.

Jim: You are very welcome. Your site is very impressive. I look forward to staying in touch.

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The Associated Press reported:

Investors are worried that a default by a government investment company in Dubai (GAF) over $60 billion in debt payments could have a ripple effect in world financial markets. The fear is that losses in the small emirate, which has drawn wealthy tourists from around the globe in the past decade with its Las Vegas-in-the-Middle East appeal, could imperil a nascent economic rebound.

This isn’t a huge surprise considering the ‘urban jungle in the desert’ exploded during the commercial real estate and oil bubbles. Now that oil has been chopped in half, the credit bubble has deflated, and tourists have less disposable income for luxurious trips to Dubai, seems like the gluttony has transformed into wrath.

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Algae could be the most promising candidate yet for the future of the biofuels industry.

Although algae-based fuels won’t be commercially available for several years, algae offers several advantages over other first-generation renewable fuels, such as corn and soybeans. For example, algae grows faster, requires less resources, can be used as jet fuel, can use existing distribution systems, and absorbs carbon dioxide and other greenhouse gasses.

And according to the WSJ, in theory the U.S. could produce enough of it to meet all of the nation’s transportation needs.

Although developing an economically viable process for refining oil from algae faces challenges on many fronts, interest (and investment) is growing.

Major players in the emerging industry include Exxon (XOM) (working with privately held Synthetic Genomics), BP (BP) (in a development deal with Martek Biosciences Corp (MATK)), Valero (VLO) (invested in Solix Biofuels), as well as the U.S. Military.  Smaller companies include Aquatic Energy, Aurora Biofuels, PetroAlgae, and Origin Oil.

Industry experts claim that in order to speed the process along, algae biofuel feedstocks must get the same benefits and incentives that first-generation biofuel feedstocks receive.

Just recently, Senator Boxer revised the definition of biofuels in the Renewable Fuels Standards of the Clean Air Act, previously defined as “cellulose-based biofuels,” to “advanced green biofuels,” as a way to include algae as a qualifying biomass material in the Renewable Fuels Standard provisions.

All of this syncs up neatly with a White House concerned with climate change and looking to develop “green energy” technologies with long economic coattails.

While it may be too early to call algae the clear winner in the biofuels race, at least for now, the future of algae-based biofuels looks bright.

Disclosure: the author has no positions in the companies mentioned.




StocksBasic MaterialsXOMBPMATKVLO

No, this is not a satire. Now that Bazooka Ben (Bernanke) has been re-appointed as Chairman of the Federal Reserve after continuing Alan Greenspan’s bubble-bust framework (albeit, not as radically), it’s the perfect time to examine the Federal Reserve’s stated mission to see whether they are succeeding or failing.

According to the Federal Reserve’s website:

“The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve’s duties fall into four general areas:

• conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system.”

Let’s look at each duty in order …

1) Maximum employment, stable prices, and moderate long-term interest rates: Maximum employment has not been achieved for two reasons. First, we have seen an incredible number of jobs go oversees while chasing cheaper wages for the same blue or white collar quality labor (e.g., China and India, respectively). So long as the government does not subsidize health care, there is literally no way we can compete until wages in those countries catch up to ours. The Federal Reserve has not done a good job actively seeking a solution to this problem … it’s getting worse. Further, if you find the U6 Unemployment Rate of 16+% unemployment to be “maximum employment,” then it’s time to call ourselves Europe.

Headline Unemployment Rate (red) v. Total Unemployment Rate (purple)

In addition, when US citizens are unemployed, we are now unemployed longer than ever before. Thus, the trend indicates another Fed failure:

Average (Mean) Duration of Unemployment

Second, we have the issue of the bubble-bust cycle in employment. I have been out of school for over a decade and lived through two bubbles and two collapses. Most people in my generation have had at least three different employers in a very short time (Cf. my grandfather who worked for one company — Brinks — for 40 years). As a result, we live with constant anxiety that our jobs will blow up at any time, we have retirement savings that are constantly rolling over (which means we don’t get a chance to reach more favorable terms), and we have spent more time searching for employment than the meaning of life. If we are to create stability in our society (the underlying mission of both the government and Federal Reserve), then we need both maximum employment and stable employment.

Stable prices have not been achieved. With each bubble we’ve had a nice taste of inflation. During the most recent debacle, housing, food and gas prices went through the roof. In this category, the Fed delegated their holy duties to housing speculators, the corn lobby (e.g., ethanol), and oil speculators. If the Fed cannot drive policy to stop this bullshit, then again they are failing.

5-Year Gas and Crude Prices

Moderate long-term interest rates have been another problem for the Fed. I asked David Proman, a portfolio manager at a boutique investment management fund, to comment: “The Fed has failed at keeping moderate long term rates because they fail to anticipate problems and then are forced to react with throw-the-kitchen-sink-at-the-problem solutions. However, by then it is too late to keep rates moderate. Technically the Fed can’t actually control long term rates. They can only hope to through issuance of debt. The only rate the Fed can control is the Fed Funds rate which is an overnight lending rate. The rest of the curve goes from there. It is really a matter of opinion whether they succeeded or failed in keeping moderate long term rates. 10-year rates have risen over 110 bps from the December lows. 30-year rates rose over 200bps but have recently fallen back down again.  I think the market has done somewhat of a decent job of correcting itself across the yield curve, although I do not think we can sustain rates this low. It is extremely inflationary to keep rates incredibly low like this for an extended period of time. Due to the fact that we just experienced (and are still experiencing) some of the greatest deflationary pressures of all time, it is probably a necessary evil to keep rates low for a while. On whether the government has done a good job, I will say they did what they had to do after the fact. But from a preventative stand point, they really blew it.”

2) Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumer: Where to begin? The recent financial crisis and economic collapse was due to a total failure to supervise and regulate banking institutions. As a result, banking institutions invented no-doc loans and we’ve had some of the biggest banking institution bankruptcies in US history. Further, the safety and soundness of the banking and financial system was completely obliterated when mortgages were allowed to be securitized (i.e., Mortgage Backed Securities) and scattered all over the globe while uncollateralized insurance (i.e., Credit Default Swaps) was sold on these shit-pit loans.

As for the credit rights of the consumer, what right does a consumer have to borrow money which has no plausible chance of being repaid? Is that good for consumers who can pay back debt? I’d love to see Bernanke write some erudite, algorithmic-based paper to explain that illogical phenomenon (blessed by the Fed).

3) Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets: Do you own a house or stocks? Then you already know that this one may be the biggest kick-me-in-the-groin-and-spit-in-my-face joke of them all. A 25-year chart of the Dow Jones Industrial Average makes the case in point:

25-Year Dow Jones Ind. Avg.

And insofar as containing systemic risk is concerned, since we just had the biggest systemic crisis since the Great Depression, I think we can use our jumbo-sized red marker to slap an “F” on this pseudo-science fair project.

4) Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system: Well, we’ve finally stumbled upon something they actually do. However, to our detriment. One look at the long-term (89-year) value of the US Dollar and we can see that the Fed has simply inflated away the purchasing power of the hard working middle class.

Source: Zerohedge.com

So yes, the Fed has provided financial services to those friends listed above. However, in doing so they have borrowed from the future to keep up with the Jone’s of the present. This is not the American legacy of working hard and building a better future for tomorrow.

For the record, I do not think we should abolish the Fed (at least in one full-swoop). Such a drastic move requires tremendous skill and a delicate touch on the part of policy makers. Unfortunately, I consider the task as challenging as teaching a sasquatch how to dance the Nutcracker. Therefore, I leave the task to Congressmen Ron Paul and Alan Grayson to figure out if we can simply make the Fed fulfill their government delegated duties.

In conclusion, this case could become a 1000 page dissertation on how the Fed fails us daily. I will leave that to those who have seven-years of Ph.D time to accomplish that goal. I, for one, have to get back to earning ever-deflating US pesos, I mean dollars, so I can buy another $4 gallon of milk and pay my unfair-valued mortgage.

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Check out some more thoughts on interesting topics:

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Is Nouriel Roubini a False Prophet?

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