Famed hedge fund investor and round-the-world motorbiker Jim Rogers is not very keen about financial assets these days, which is not entirely surprising given that he runs a commodities fund.
Maybe the bearish outlook has to do with the view of the world from Singapore. Marc Faber, who makes most of his TV appearances from Singapore, says he holds almost entirely cash and stocks, and considered himself to be making a bullish move by going from 7-8% equities to 10%.
From Bloomberg:
The rout in global markets may continue while bonds will be a “terrible” investment as economic problems may persist until 2010, investor Jim Rogers said.
“Stocks in the West are still expensive on any historic valuation method,” while “bonds are going to be a terrible place to be for the next 10, 20 years,” Rogers, chairman of Singapore-based Rogers Holdings, said at a conference in Seoul today. Equities in the West will be “in a trading range for years to come,” he said…
“I have started going back into the markets; that does not means it’s the bottom,” Rogers said. His purchases since mid- October include commodities and equities in China and Taiwan, as well as “a Korea stock,” he said, without giving deails.
“We may be hitting `a’ bottom,” Rogers said. “I don’t know if it’s `the’ bottom.”
Rogers, 66, correctly predicted the start of the commodities rally in 1999. His books include `Hot Commodities: How Anyone Can Investment Profitably in the World’s Best Market’ and `A Bull in China: Investing Profitably in the World’s Greatest Market.’
Rogers continues to favor commodities as an investment as fundamentals are “unimpaired” amid a global liquidation of assets, he said. “You will see that stocks have gone down more so far than commodities. That will continue as far as I’m concerned.”
An MSCI index of developed- and emerging-market stocks has lost 44 percent so far this year, compared with a 30 percent decline in the Reuters/Jefferies CRB Index of 19 commodities.
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Marc Faber quoted Rogers to have said, “You can short GM at any price.”
Simply brilliant, but then again, you only needed to drive a GM vehicle to know that most of their cars are POS.
For some reason this guy really irritates me. He seems to personify the greed and arrogance that got us into this problem in the first place. And I’m sure he’s adored by MBAs…
Yves, Jim Rogers is a FRAUD.
-I almost choked on an ice cube when I read the headline.
He’s a shameless pumper for whatever he’s promoting. If you ever headline with “JIM CRAMER PROCLAIMS BULL RUN”, I don’t know what I’ll do.
Jim Rogers has made some good calls.
Jim Rogers has made many calls
Not all were good
Jim Rogers did not call the collapse in commodity prices.
I find Rogers to be refreshing. I recall him being interviewed on Bloomberg, probably April or May, and he was talking about Citi which was then trading, I think, around 30 bucks a share. After railing for a bit about how everybody should avoid buying into the financials, even at the then depressed levels, the interviewer asked him at what point Citi might be an attractive buy. Rogers said “when it’s at 7”. Cracked me up. And it’s just about there. Nice call.
Rogers is a promoter but he’s been right a lot of the time lately. Assuming that we do come out of this catastrophe, and we will, the global economies are more likely than not to emerge at the same time. Result, a tremendous call on natural resources. Don’t count commodities out. They won’t have to adjust to as many new paradigms that most companies will face.
The real question is what central banks and politicians will do in the years to come, and that depends on the prevailing economics ideology. My impression is that this ideology will lead to massive fiscal deficits in both short and long-run, with monetization of the debt in the short-run (Fed buys up debt to keep interest rates low) in order to halt the deflationary bust, followed by sterilization in the long run (Fed sell debt to drive interest rates high) to keep inflation under control once the economy recovers. An alternative scenario would have Congress raise taxes or cut spending after the economy recovers in order to keep inflation under control, but I see that as unlikely. A doomsday scenario would have no massive budget deficit in the short-run, but rather a deflationary depression–hopefully the Republicans won’t try to gridlock things enough to bring this about.
Monetization will prevent a meltdown in asset prices in the short-run, but the subsequent sterilzation will prevent a recovery of deflated asset prices in the long-run. Asset prices (stocks, real-estate, land, commodites, bonds) will thus stay where they are for at least a decade, with the P/E ratio or its equivalent gradually declining as earnings grow in line with nominal GDP growth, but prices remaining stable. The situation will change sometime between 2020 to 2030, when a new ideological consensus is reached to the effect that the Fed or some other independent body must be given authority to raise taxes and/or cut spending, since Congress is incapable of doing this on its own. Only then will real interest rates decline again, at which point asset prices will explode on the upside. Again, this is unlikely to occur before 2020 or 2030.
Watch the long TIPS rates carefully for guideance as to where things are heading. They were over 4% in the late 1990’s, then fell to under 2%, and were recently back over 3%. I expect them to hit 4% again before we are done. Obviously, stocks should pay a real yield above the risk-free rate on TIPS, say 2% higher. Also, for various reasons, the long-term real return on stocks should be about 2% above the dividend rate, which is currently about 3%. Putting all these factors together suggests that stocks need to drop another 20% or so in real terms before we hit bottom. Real-estate and commodities have even further to fall. Demand for commodities is growing, to be sure, but supply is growing even faster, especially since technology makes it possible to substitute cheap commodities for more expensive commodities.
Cash and (for the professional only) carefully selected distress situations (junk bonds and stocks of companies facing bankruptcy) are the best place to be for now. Once they become cheap enough, quality stocks will be the best investment available.
Rogers is one of the few that calls for abolishing the Federal Reserve and every time he says it, the same blank stares and deaf ears are the reactions.
“Rogers is one of the few that calls for abolishing the Federal Reserve and every time he says it, the same blank stares and deaf ears are the reactions.”
Well maybe if he had more constructive suggestions people would listen. But, yeah it’s a nice sound bite.
Anyway, so moving to state-run Singapore is the answer? Ha! what a phony.
Jimbo, I'm with yah baby. I think S&P is about fair valued after it falls another 7%, as a start, but then, at that point, I think we see dividend cuts across the board for all stocks on wall street. I noticed today that share prices are falling as one might expect, based on earnings yields falling — but the dividends by-in-large are being protected, thus, this will be the next shoe to drop, because, at some point very soon — it isn't going to be possible to prop up $2.00 stocks and pay an 8 or 6% dividend. All yah have to do is look at treasury yields around the globe, see sales crashing, think about the reality of the recession, then realize, dividends have to become fairly valued in proportion to share values.
That's it, amen and out!
Simon, thank you for your post. I have this feeling that a lot of money is to be made in shorting the treasury but wasn’t sure where along the yield curve to start.
One thing I don’t understand about your view is why would the Fed want to sterilize at the long end. Wouldn’t the result be the same if the Fed were to sell the same T-bills that they bought?
Maybe you could help me with sterilization. Steve Waldman, in a post Yves linked to, doubted that the Fed could sterliize because they don’t/won’t have enough Treasuries. They have sold all their nice Treasuries for these crappy facilities.
They can’t sell the collateral they got because it is collateral (that is, unless the borrower defaults).
So how do they sterilize? If a smart guy like Waldman says they can’t do it, or can’t do it in remotely enough size, does that make sense? I recall reading that China’s inflation had risen because their US Treasury purchases had created monetary growth in excess of what they could sterilize, so clearly this does happen. I am just uncertain about the mechanics.
Anonymous, sterilization is usually discussed in the context of currency intervention, but it’s functionally the same when a central bank wants to drain cash from the system.
It’s the process of selling longer-dated assets in exchange for zero-maturity money. This locks money up for a time, effectively removing it from current circulation. Usually, this would be done by selling off some of the treasuries on the Fed’s own books for cash. The Fed will take the cash it receives and sit on it.
If the Fed doesn’t own enough treasuries, it might not be able to do this in large enough scale on its own. Now, the Treasury could just issue more treasuries and sell them to the Fed.
But as commentator JKH points out there, the new ability to pay arbitrary interest rates to banks on their deposits is quite similar and can be used for sterilization. The banks deposit their cash with the Fed, which locks it up, taking it out of circulation.
Steve’s response is that the big difference is maturity: these deposits are generally just overnight, while a Treasury has a much longer term, up to 30 years, but with whatever maturity the government wants. The Fed could start offering CD’s, essentially, to remove even this distinction, but they haven’t done this yet.
HTH…
Jim Rogers doesn’t have anything to lose so he can say how things really are. And I love the fact that he has visited almost every stock market in the world, even the black markets. True global investing view.
Jim bought Chinese and Taiwanese stocks a couple of months ago when the SSE was trading at 3000 and the TSEC was trading at 9000. The guy must be losing a lot of money these days.
ndk pretty much summed it up about the mechanics of sterilization. Anyway, monetization and sterilization are just fancy ways of saying that the Fed can, one way or another, raise interest rates. Either raise/lower the overnight rate exclusively, or raise/lower across the board. Either raise/lower just treasuries, or raise/lower everything. The mechanics of how they do it is really irrelevant from the standpoint of the investor. Main thing is don't ever, ever underestimate the power of the Fed. Whether the Fed chooses to use that power depends, as I pointed out, on the current consensus view on what is "proper" economics policy.
Ever since WWII, the consensus view has been that the Fed and the fiscal authority (Congress) should act in a contra-cyclical way to deal with recessions. Ever since 1980 or thereabout, the consensus view has been that the Fed should prevent inflation from getting out of hand, even if this means more frequent or deeper recessions. Starting 2008, a consensus is developing that the Fed should act preemptively to prevent bubbles. Starting somewhere between 2020 and 2030, a consensus will develop that the Fed must be given authority to raise/lower taxes, in addition to raising/lowering interest rates, because Congress is incapable of raising taxes on its own, and Congress is too slow about lowering them (due to political infighting).
Understanding the prevailing consensus view on proper economics policy is essential to predicting what the Fed and Congress will do, and that, in turn, will pretty much tell you what the macro world will look like down the road.
Long treasuries won't stay at 4% forever, that's a pretty sure bet. In fact, I don't know why they are there now. But then I didn't know why S&P500 was overpriced all the way from 1997 or so through Oct 10 (other than a brief approach to fair value territory late in 2002). Markets can stay irrational for a long time. I'd hate to wait 5 or more years for short bet on treasuries to come through. But yes, it will pay off eventually.
There's very good S&P 500 calculator here:
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The S&P 500 at Your Fingertips
Countless hours have been spent by stock market investors researching the historic performance of the S&P 500 stock market index but until now, they've had to slog through spreadsheets or go datamine other reams of data to be able to extract the data they're after, and that's before doing any number crunching! Now however, everything has changed because we here at Political Calculations are putting the entire encapsulated history of the S&P 500 at your fingertips!
We've taken the raw data from the sources linked above, and made it easily accessible by selecting a month and year in our tool below. The tool will provide the average index value of the S&P 500 for the given month and year, the associated dividends and earnings for that month and year, not to mention the dividend yield and the price to earnings ratio. For good measure, we threw in the value of the Consumer Price Index as well!
Link
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Beginner here…
Can someone explain to me what Simon meant by, “Long treasuries won’t stay at 4% forever, that’s a pretty sure bet… […] I’d hate to wait 5 or more years for short bet on treasuries to come through.”
Is he suggesting that treasuries ought to come down? and short bet as in betting on it coming down?
Thanks
Simon’s comment is thought-provoking, only I lack his confidence in central banks’ ability to stabilize asset prices. That might be the only thing that helps me see eye-to-eye with Rogers on one point: quality corporate bonds pay well right now, but the big question is, will default risk decline before inflation beats them down? If so, you’ve got an exit window.