An Interview With Jim Rogers – Of Course We Are In A Stock Market Bubble
Jim Rogers is the chairman of Rogers Holding Inc. and the bestselling author of various financial books. Roger’s rise to fame occurred in the 1970’s when he co-founded the Quantum Fund with Billionaire George Soros and captured a 4200% return in ten years. Below is an edited summary of his interview with The Investor’s Podcast where Rogers discusses gold, India, and current market conditions in the United States.
Preston Pysh: First thing I want to talk about is gold. You have a position in gold, but you are hesitant to increase that position right now. Currently, we are in the second quarter of 2017. What are some things that would change this decision for you?
Jim Rogers: Price is the main determinant, or time — if it was 2019, I might rush in and buy gold. For me, gold has not had enough corrections yet. There are still too many gold bugs.
Pysh: So you are looking at it more from a psychological perspective. Would you say that the right time to buy gold is actually when there are a lot of people avoiding gold?
Rogers: When people say, I never want to invest in gold again, that is when I want to invest in it. This is true of many things. When everybody is throwing it out the window, that is usually a good time to buy anything including gold. So far, there are too many people that love gold.
Pysh: I was expecting you to give a quantitative answer, but I am surprised that you gave such a qualitative answer.
Rogers: Investing is both qualitative and quantitative. I wish it was simple, but investing is a combination of everything, for gold and everything else. Gold has been around for thousands of years, so it has gone through many periods of bull and bear markets. Many people think of gold as a currency, but it is just another investment.
Pysh: What do you think is the best approach to gold? I am thinking the best way would be to put a two and a half year call option on some gold mining companies. What do you think?
Rogers: A two and a half year call would be fantastic if you can get the timing right at the bottom. You have enormous leverage with calls. You could do this with futures as well. If you get the timing and the product right with either calls or futures, you can make a lot of money.
Stig Brodersen: You have been the forefront of various markets. For example, you wanted to buy the Danish Krone when it seemed like nobody even knew about it. How do you come up with such original ideas, and how do you validate your ideas before you actually invest in them?
Rogers: I have learned that the more people ridicule and question you, you are probably onto a good thing no matter what it is. If you are observant and notice a change and that change is something cheap and ignored in the way that the Danish Krone was in the past, you are probably going to make a good investment.
Pysh: Which area of the U.S. market — currencies, commodities, bonds, stocks, etc. — could a person apply that thought process to a pick?
Rogers: Whatever people are doubting may be an investment opportunity. Agriculture in the United States is pretty depressed right now. This may be an area where there is an investment opportunity. However, you should be cautious about investing in an area just because it is depressed right now because that area could stay depressed for a very long period of time. This is why you have to find a change that is taking place as well. If you can find something cheap and if you can find a positive change, maybe you should do more homework and find an investment.
Brodersen: Could you talk about catalysts? Some people would say value in itself is a driver, but how do you assess catalysts and when do you see that something is about to change so it will realize its intrinsic value?
Rogers: That is the important part. I have learned that personally, I am usually too early. I see something happen, and I assume everybody else sees it too. Now I know that they do not, so I have learned to wait a year or two. The change, or catalyst, could be anything. I want to emphasize that even when you see the catalyst, it is futile if everyone else sees it too and the effects come in quickly. It usually takes a while for the catalyst to work its way through.
Pysh: In your book Street Smarts, you talk a lot about the idea that the capital flows are drastically changing from what the U.S. has experienced over the last 75 years. You feel that a lot of big opportunities have moved away from the U.S., Europe, and Japan now to China, Singapore, and most of Asia. Do you perhaps see this trend in a similar light as Ray Dalio with long-term credit cycles?
Rogers: Ray is a lot smarter than I am, but I do perceive that the world is always changing. What you think is true today will not be true in 15 years. Pick any year in history, and what everyone believed that year is no longer relevant 15 years later. In an even bigger picture than a 15-year cycle, Asia is rising whether we like it or not. Asia is where the money, energy, ambition, drive, and the brains are. China currently puts out something like 10 times as many engineers as America does. This may not have an immediate effect, but it will have an effect someday. In 1807, the smart people moved to London. In 1907, the smart people moved to New York. Well in my view, the 21st century is the century of Asia
Pysh: Do you think the central banks are the root cause of this trend?
Rogers: We have not had central banks for the most of history, but a lot of what is happening right now is because of central banks. The United States has had three central banks; the first two disappeared, and in my view, this one is going to disappear too because they are making so many mistakes. Regardless, central banks are a powerful influence in the world right now. They have a lot of money, and therefore a lot of influence, so a lot of what is happening in the world is because of central banks for better or for worse.
Pysh: Considering the U.S. Federal Reserve’s policies, how is the dollar getting stronger against other currencies? Are other central banks just doing worse than the U.S. central bank?
Rogers: You are right, part of the reason why the U.S. dollar is so strong is that the other countries’ central banks are so bad. The head of the Japanese central bank said they will print unlimited amounts of money if they have to. Anybody thinking about the Japanese yen has to think about unlimited amounts of money along with staggering internal debt. The Euro is a wonderful concept but its execution has been hopeless. Although the U.S. dollar is a terribly flawed currency, many people consider it a safe haven for historic reasons. You look around the world, and there are not many better alternatives. People put money in the U.S. dollar, and the dollar is going to get overpriced as the turmoil worsens.
Pysh: The central bank of Japan owns a large portion of the world’s stock market. When Japan runs out of assets like bonds and stocks to exchange into currency, are we going to see the currency in hyperinflation?
Rogers: Japan is unique because they have somewhat of a closed society and economy. They can continue to trick each other for a long time that everything is great. The media and the emperor will tell the people that everything is fine, and the people will believe that. I do not know when it is going to happen, but we have had economic problems every 5 to 10 years since the beginning of time. We are going to have problems again no matter what the press says. The media and the emperor can keep telling the Japanese people that everything is fine, but it will end badly whether we like it or not.
Brodersen: It appears that most Northeast Asian economies that have done well follow the steps of cultivating land, manufacturing the resources, and making policies that support agriculture and manufacture. India, however, skips the steps and goes straight into IT and more advanced services. How do you view the sustainability of the Indian economy?
Rogers: There are one billion Indians. You and I know about the IT in India, but that is such a small part of the Indian population. The Indian government loves to say things are great, but when you actually visit the country, you will see that things in India are not that great. I have occasionally invested in India, sometimes get it right, and usually have gotten it wrong because of the timing. India has a lot of debt that the government does not like to talk about. The debt to GDP ratio is very high in India, which means that they cannot grow at a rapid rate.
Brodersen: What is the driver for sustainable growth for a country like India with low employment rate in manufacturing?
Rogers: Unfortunately, I do not see a lot of sustainable growth in India. We never see Indian products in the U.S. market. I doubt you could name more than one or two Indian-brand products in your home. This is because they have not had great manufacturing success. India used to be one of the great agriculture countries in the world because of its soil and weather, but the government restricts the Indian farmers to owning only 12 acres. They cannot compete with other farmers who own a lot more land. The Indian government protects many parts of the economy. This is one of the reasons that India has not done as well as others.
Pysh: In the time that you were working with George Soros, what would you say was his greatest strength? What would you say your contribution was in the relationship?
Rogers: I left 37 years ago and have not had contact since. We were both dedicated and passionate about our work. He was a great market timer. I do not think you go to school to learn to become a great trader; I think you either have it or you do not. I have no idea what he has been doing these days, but back when we worked together, I did a lot of the research and reasoning for a position. In the first 10 years of our work, our return was 4200%.
Brodersen: You are a very modest person, but could you tell us what you think your competitive advantage is as an investor?
Rogers: I had success whenever I found things that were very cheap where there was positive change taking place. I usually invested too early, but I held them for years. If I have any competitive advantage, it would be that I can see things changing. I make a little bit of money when I get the timing right.
Pysh: Would you say that those who get the timing right are focused more on the price or on the news?
Rogers: The price changes because of the news. When there is news that disaster is happening, it usually leads to price drops. Disasters can present buying opportunities, and I as a short-term trader look for opportunities in such times.
Pysh: In a December 2015 article, you recommended a ticker called SJB, a high-yield bond short. Even though I usually do not like shorting the market, your recommendation made sense to me. The position has gone down about 10% from whenever I bought it, and I still have the position to this day. A lot of our listeners are interested in this ticker, so I want to hear your thoughts on this position.
Rogers: Do not listen to me for market timing. I own the position because I know that the junk bond market is going to collapse one day, but I am losing money in the meantime just like you. When people borrow staggering amounts of money, own very few assets, and have little ability to make money, it is bound to fall apart. I may fall apart first though because my timing is so bad.
Brodersen: It seems to me that you have a lot of ideas, but at the same time you are picky about choosing which ones to actually invest in. Could you tell us about how you size your positions and why?
Rogers: I do not have a preconceived position size, I buy it as long as I think the price and the opportunity are right. When I run out of money or patience, I stop. A part of the problem is that I do not have a committee. I invest my own money, therefore I am not required to explain to a committee why I am doing what. It is sloppy. Maybe I should have a committee, but at the moment, I have enough money to get away with being sloppy.
Pysh: Are there any indicators you personally pay attention to that signal the contraction of a credit cycle?
Rogers: You see throughout history that all bubbles look the same. When you see that everyone is doing the same thing, that is when you have to be aware. The most dangerous words in the investing world are “it is different this time.” It is never different. I am not the first person to figure this out.
Pysh: Stig and I believe that today, the second quarter of 2017, a stock market bubble is happening in the United States. Do you agree or do you think it has a lot more to run?
Rogers: Of course it is correct. It is simple because it always happens the same way. Right now, all types of debts are making historic highs, and everyone is convinced that they cannot lose money in bonds. Such things have happened before and they are happening again. As I have said before, the world has had economic problems every 5 to 10 years. We had a problem in 2008 because of debt, and the debt is much higher now. Thus, it is going to be an even worse problem than before.
Pysh: I think European banking is the main catalyst for economic problems right now. Do you agree or do you think something else is the main threat?
Rogers: These things usually start where we are not looking. In 2007, Iceland went bankrupt. Most people did not pay attention to this, but this snowballed and next thing you know Ireland is bankrupt. Right now, there is probably something running into trouble that we are not paying attention to, and it will snowball. Yes, the European banks are going to have problems, some will go bankrupt, but American banks have problems too. The U.S. Federal Deposit Insurance Corporation is bankrupt, and while it is still there, once the bank system starts having problems, it cannot meet its obligations.
Brodersen: It seems that many markets are overpriced right now and that we cannot correctly time the market. There are people that do not want to short the market but want to invest their money somewhere. How do you position yourself in such situation?
Rogers: I have mentioned some things; I own a lot of U.S. dollars, I short junk bonds, the agriculture has been depressed for a while, I own China — although some parts of the Chinese economy will collapse, others parts of the Chinese economy will be fabulous. The government is spending unbelievable amounts of money to clean up the pollution. Those cleaning up China’s massive pollution will do well even if Europe disappears. Some parts of the Chinese economy will do well no matter what, others will go bankrupt. Russia is hated but I am optimistic about the changes in Russia. There are places that are depressed that one can put in money. I own gold and silver although I am purchasing more at the moment. There are many opportunities, I am just too lazy to get to all of them.
Preston Pysh is the host of the business podcast, We Study Billionaires. The show studies the books billionaires read and attribute to their success.