Jim Rogers and James Grant Accurately Predicted the end of the SNB’s Disastrous Policy

What has Jim Rogers and James Grant have in common?

Well, not only have they predicted the outcome of the SNB’s policies, both lean on or use Austrian economics for their analysis.

The legendary investor Jim Rogers’ warned of the unsustainable policies embraced by the SNB in his book 2013 book Street Smart.

Here’s an excerpt (sourced from Business Insider Australia) [bold mine]

I had opened my first Swiss bank account in 1970 in the face of coming turmoil in the currency markets. By the end of the decade, as the markets grew more volatile, people all over the world were trying to open Swiss accounts. And the same thing is happening today. The dollar is suspect, the euro is suspect, and again people are rushing to the franc. In 2011, the CHF (the Swiss franc) escalated to record highs against both the euro and the dollar, rising 43 per cent against the euro in a year and a half as of August 2011.

It was a “massive overvaluation,” according to the country’s central bank, the Swiss National Bank (SNB). Under pressure from the country’s exporters, the SNB announced that “the value of the franc is a threat to the economy” and said it was “prepared to purchase foreign exchange in unlimited quantities” in order to drive the price down.

A threat to the economy? It was the exporters who were doing the screaming, but everybody else in Switzerland was better-off. When the franc rises, everything the Swiss import goes down in price, whether it is cotton shirts, TVs, or cars. The standard of living for everybody goes up. Every citizen of Switzerland benefits from a stronger currency. Our dental technician down in Geneva is not calling up and moaning. She is happy. Everything she buys is cheaper. But the big exporters get on the phone and the government takes their call.

The franc went down 7 or 8 per cent the day of the SNB announcement. Nobody, at least in the beginning, wanted to take on the central bank. But the bank’s currency manipulation will turn out to be disastrous. One of two things is going to happen.

In the first scenario, the market will continue to buy Swiss francs, which means that the Swiss National Bank will just have to keep printing and printing and printing, and that will of course debase the currency. Now, there are major exporters in Switzerland who might benefit, but the largest industry in Switzerland, the single largest business, is finance. The economy rises or falls on the nation’s ability to attract capital. And the reason people put their money there is their trust in the soundness of the currency- they not that their money will be there when they want it, and that it will not be worth significantly less than when they put it there in the first place.

But people will stop rushing to put their money into a country where the value of the currency is deliberately being driven down. After the Second World War and for the next thirty years, people took their money out of the United Kingdom because the currency plummeted. (Politicians blamed it on the gnomes of Zurich.) London ceased to be the world’s reserve financial center because Britain’s money was no good. Similarly, if you debase the franc, eventually nobody will want it. You will have eroded its value, not simply as a medium of exchange, but also a monetary refuge. The money will move to Singapore or Hong Kong, and the Swiss finance industry will wither up and disappear.

The alternative scenario is what happened in July 2010, the last time the Swiss tried to weaken their currency. They did so by buying up foreign currencies to hold against the franc-selling the franc to keep the price down. But the market just kept buying the francs, and the Swiss central bank, after quadrupling its foreign currency holdings, abandoned the effort. At that point, when the bank stopped selling it, the Swiss franc rose in value, all the currencies the Swiss had bought (and were now holding) declined in value, and the country lost $US21 billion. In the end, the market had more money than the bank, and market forces inevitably prevailed.

In the late 1970s when everyone was rushing to the franc, the Swiss National Bank, to stem the tide, imposed negative interest rates on foreign depositors. The government levied a tax on anybody who bought the currency. It was their form of exchange controls back then. If you bought 100 Swiss francs, you wound up with 70 in your pocket. Today, with the rush on again, The Economist has described the Swiss currency as “an innocent bystander in a world where the eurozone’s politicians have failed to sort out their sovereign-debt crisis, America’s economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen.”

All of which is true, but I think the problem runs deeper than that. The Swiss for decades had a semi monopoly on finance. And as a result they have become less and less competent. The entire economy has been overprotected. The reason Swiss Air went bankrupt is because it never really had to compete. Any monopoly eventually destroys itself, and Switzerland, in predictable fashion, is corroding from within. As a result, other financial centres have been rising: London, Lichtenstein, Vienna, Singapore, Dubai, Hong Kong.

Well again, James Grant of Grant’s Interest Rate Observer shares the limelight for having foreseen the unraveling of the ill fated franc-euro cap. 

From Grant’s Interest Rate Observer: “The Balance Sheet that Ate the World September 19, 2014 (source LinkedIn; hat tip zero hedge) [bold mine]

Like a celebrity in flight from the paparazzi, the Swiss Confederation demands protection from its pesky admirers. To beat back the unwanted appreciation of the Swissie, the Swiss National Bank is--once again--vowing to move heaven and earth. Now under way is a speculation. Prompted by a friend (that's you, Harlan Batrus),we venture that the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It's a long shot, to be sure--the options are cheap for a reason--but we judge that the prospective reward is worth the obvious risk.

Curiously, for all the damage that Swiss private banks have suffered at the hands of American regulators, and for all the Federal Reserve's throat clearing about the supposed imminent rise in dollar interest rates, the franc is still, for many, the monetary bolt-hole of choice. To the Swiss, whose exports generate 54% of Switzerland's GDP, it's a kind of popularity they can live without--indeed, they insist, must live without.

So the SNB prints francs. It drew a monetary line in the sand three years ago: The franc shall not rally through the 1.20-to-the-euro mark, the authorities commanded in September 2011. To enforce this dictum, they bought euros with newly created francs (the cost of production of the home currency being essentially zero). What to do with the rising euro mountain? Invest it, of course.

CFA fashion, the central bankers are diversifying across asset classes and currencies. Among these asset classes are equities, and among these currencies is the dollar. As of June 30, the Swiss managers held $27 billion in 2,533 different U.S. stocks, according to the bank's latest 13-F report (the gnomes file with the SEC just like ordinary big hitters, say George Soros or Goldman Sachs Asset Management).

Here's a metaphysical head scratcher. The Europeans conjure euros, which the Swiss buy with their newly materialized francs. The managers exchange the euros for dollars (also produced by taps on a keyboard) and with that scrip buy ownership interests in real businesses. The equities are genuine. The money, legally and practically speaking, is itself real--you never mind having a little more of it. But what is its substance? We mean, how is it different from air?

In any case, observes colleague Evan Lorenz, the scale of the Swiss operations is titanic. He reports that, from December 2007 to July 2014, the SNB's balance sheet expanded to the equivalent of 83% of Swiss GDP from 23% of Swiss GDP. For perspective, over approximately the same span of years--and after three successive QE programs that boosted the Federal Reserve's assets by $3.5 trillion--the Fed's balance sheet as a percent of U.S. output expanded to 25% from 6%.

Swiss interest rates have shriveled as the SNB's balance sheet has grown. Thus, in January 2008, the average rate on 10-year, fixed-rate mortgages was an already low 4.17%; as of June 2014, 10-year loans were offered at an average of 2.25%. "In other words," Lorenz points out, "Swiss homeowners can borrow more cheaply than Uncle Sam." They can and they do. From December 2007 to June of this year, Swiss mortgage debt as a share of GDP surged to 146% from 127%. (Between the first quarter of 2009 and the first quarter of 2014, chastened Americans reduced America's mortgage debt as a share of American GDP to 55% from 74%.)

In these stupendous interventions, the SNB is hardly unique. Nor is it alone as it attempts to undo, through administrative means, the distortions it creates through monetary policy. New "macro-prudential" directives have tightened standards for home-loan amortization schedules, minimum down payments, affordability, bank capital ratios, etc.

Though the UBS Swiss Real Estate Bubble Index continues to flash "risk," the mortgage market cooled a bit in the first half of the year, Philippe Béguelin, an editor at Finanz und Wirtschaft in Zurisch, advises Lorenz. Then, too, the foreign exchange market cooled late in 2013, which allowed the SNB to cease and desist from franc printing. Thus, the central bank's assets declined to CHF 492.6 billion in February from a peak of CHF 511.7 billion in March 2013.

Russia's accession of Crimea at the end of February reheated the forex market. ISIS and the Scottish referendum have continued to turn up the temperature. Business activity in China continues to dwindle (electricity production fell 2.2%, measured year-over-year, in August), and European growth registers barely above the zero line. On Sept. 4, Mario Draghi unveiled a plan for a kind of euro-zone QE. So growth in the SNB's balance sheet has resumed. In July, the latest month for which figures are available, footings reached CHF 517.3 billion in July, a new high.

"If the drumbeat of bad news continues, why wouldn't investors move more cash into Switzerland?" Lorenz inquires. "Successive rounds of easy money have made the opportunity cost of parking assets in Switzerland much lower today than at the outset of the SNB's currency ceiling. True, the Swiss 10-year yield has declined to 0.49% from 0.93% since Nov. 1, 2011. But yields on the Irish, Spanish and Greek 10 years have also plummeted--to 1.88%, 2.33% and 5.69%, respectively, from 14.08%, 7.62% and 37.1%, respectively, at their euro-panic peaks. It no longer avails the income seeker much to gamble on second- and third-tier sovereign credits. Swiss yields are at rock bottom, but so are the rest of them. On the combined, undoubted authority of Deutsche Bank, Business Insider and Bloomberg, Dutch yields stand at a 500-year low."

It's a funny old world when frightened people turn to the Swissie, which the SNB is again mass-producing, rather than to gold, which nobody can mass produce. While the franc yields something to gold's nothing, the spread is narrowing. And if as Thomas Moser, an alternate member of the SNB's policy-setting Governing Board, suggested in a Sept. 10 interview with The Wall Street Journal, the SNB finally has recourse to negative rates, the barbarous relic will outyield the franc. Way back in the 1970s, relates Christopher Fildes, a delegation of foreign newspapermen were visiting the old Union Bank of Switzerland in Zurich. In response to a casual remark about the proverbial strength of the franc, a Swiss banker scoffed. "We do not say 'as good as gold,'" declared this eminence. "Gold is not as good as the Swiss franc." And now?

A bet on a higher Swiss/euro exchange rate implies that the SNB will stop intervening. What monetary or political forces might converge to persuade the bank that a strong franc is the lesser of two or more evils? "John Bull can stand anything but he can't stand 2%," the saying goes. It's clear to listen to their anguished cries that broad segments of the life insurance industry can't stand one-half of 1%. The Tokyo Stock Exchange TOPIX Insurance Index is essentially unchanged since 1994, the year that Japan government bond yields began their inexorable slide. "We are the collateral victims of the monetary policy which has been designed to help governments and banks after the financial crisis," Denis Kessler, the CEO of Scor SE, the world's fifth-largest reinsurer, complained at a London conference on June 24. "We were not at the heart of the crisis nor did we create the crisis."

More money printing or sub-zero rates may once again set a fire under Swiss house prices, macro-prudential policies notwithstanding. It may ruin the life insurers. At some point, the Swiss National Bank would have to decide whether propping up the export sector is worth the cost. If these circumstances, a bet (and, to be clear, it is very much a bet) on the franc appreciating against the euro might pay. A three-year, at-the-money option on the franc appreciating against the euro is priced at 3.7% of notional today according to Bloomberg. To return to its high of 1.03 francs per euro on Aug. 10, 2011, the franc would appreciate by 17%.

While there is nothing especially exotic about this option, it is available only to institutional investors with an International Swaps and Derivatives Association agreement in place with a too-big-to-fail bank. For readers not so situated, there is always gold, which--in our opinion--the franc is no longer as good as.

Bottom line: as the fateful SNB episode demonstrates—there are natural limits to the policies of inflationism.

Investing Tips from Jim Rogers and Jim Chanos

Investing tips from investing titans

First the legendary Jim Rogers (from the Financial Post)

“Most successful investors, in fact, do nothing most of the time.”

“If you want to make a lot of money, resist diversification.”

“It is remarkable how many people mistake a bull market for brains.

“On Wall Street there’s no truer adage than …’markets can remain irrational longer than you can remain solvent.'”

“No matter what we all know today, it’s not going to be true in 10 or 15 years.”

“If you want to be lucky, do your homework.”

“Swim your own races.”

“If the world economy gets better, commodities are very good place to be in … even if the world economy does not improve, commodities are still a fabulous place to be.”

“The most sensible skill that I can give to somebody born in 2003 is a perfect command of Mandarin.”

“Become a Chinese farmer, that’s what you should do.”

“If you can find ways to invest in Myanmar, you will be very, very rich over the next 20, 30, 40 years.”

“India is not a place for investors, but it’s a fabulous country for tourists”

“I don’t know any way to short either Harvard or Stanford.”

“I was poor once, I didn’t like it, I don’t want to be poor again”

Read the explanations here

In my opinion when Mr. Roger says "No matter what we all know today, it’s not going to be true in 10 or 15 years". He should apply the same word of caution on his views of China and or to Myanmar or to anywhere else.

Now to the famous short selling artist Jim Chanos (from Business insider) [ht financial post]

On Chinese politics: 

"When the leaders are all billionaires we must say that the Marxist-Leninist ideology has maybe been watered down a bit, sometimes with pigs in it."

Being a one of the strident China bear, Mr Chanos rebuts a Tu-quoque fallacy  

"'Mr. Chanos has never been to mainland China.' Well hell, I didn't work at Enron either."

On Chinese growth 

"It's the accounting tail wagging the economic dog."

On Chinese government statistics: 

"I'm not the only guy crying in the wilderness about the data coming out of China."

On Chiina’s banking system 

"The Chinese banking system is built on quicksand."

On investing research: 

"Primary research is crucial and not as many people do it as you think."

Also, do it on bottom up manner: 

"Nothing beats starting with source documents."

On conflict of interest: 

"The biggest mistake people make is being co-opted by management."

The role of short sellers: 

"The most important function that fundamental short sellers bring to the market is that they are real time financial detectives."

The intertemporal value of long term insights: 

"In investing, you can be really right but temporarily quite wrong."

Valuation matters: 

"Some of the best short ideas can look cheap from a valuation standpoint."

Spotting major errors: 

"We try to focus on businesses where something is going wrong."

Value versus shorts: 

"There’s a big difference between a long-focused value investor and a good short-seller."

On independent thinking: 

"You need to be able to weather being told you’re wrong all the time."

On Dubai’s bubble: 

"Go to Dubai and see what happened. It was…what I call it the 'Edifice complex'."

On monetary policies: 

"If everyone knows you're going to print money ... you know ... welcome to Zimbabwe."

On US and Europe’s economic problems: 

"We keep kicking the can down the road. But maybe now we're at the point where the can is kicking back"

On what I usually write about as the agency problem in the financial world: 

On being a broker: “They’re not interested in truth or what’s best for the client, but in making the sale with the least amount of work.”

On Noise versus signals: 

"Though I listen to the noise to make sure there’s no new information that I need to know, I don’t worry about most of it."

On government interventions: 

"Beware of the law of unintended consequences"

On the role of luck: 

"A lot of what happens in your life is merely serendipitous and really just luck."

A career advise: 

"If you ever have an idea and you think you need to take career risk to accomplish it, do it early in your career."

Read the explanations here

Jim Rogers: US Stock Markets in a “Fool's Paradise”

The CNBC recently interviewed the legendary investor Jim Rogers who warned US stock market investors to “be careful”

The mania phase:

The U.S. is the largest debtor nation in the history of the world…We may well have a big, big rally in the U.S. stock market, but it's not based on reality. I would encourage investors to know you're in a fool's paradise, be careful, and when people start singing praises, say, 'I've been to this party before, and I know know it's time to leave.

The Fed Backlash

it is only a matter of time until the U.S. stock market runs into devastating problems due to the Fed's quantitative easing program and the prevalence of similar stimulative programs around the world.

Seasonal patterns + bigger imbalances

First of all, throughout American history, we've always had slowdowns every four to six years. That means that sometime in the next couple of years—three years, maximum—we are going to have problems again, caused by whatever reason,..For instance, there was 2001 and 2002, and then 2007 and 2009 was much worse. Well, the next time it's going to be worse still, because the level of debt is so, so, so much higher. Every country is increasing its debt at the same time.

Unsustainability of Fed Policies

This is the first time in recorded history that we have every major central bank in the world printing money, so the world is floating on an artificial sea of liquidity. Well, the artificial sea is going to disappear someday, and when it does, the catastrophe will be even worse. Yes, it's coming..If I was smart enough to tell you when it's going to happen, I would get rich.

Sitting and watching for now

I don't see any reason to rush out and sell stocks now, because of these artificial currents which are taking place. I'm not buying U.S. shares at the moment, but I'm not shorting either, because I am concerned this may turn into a huge bubble. So I'm sitting and watching.

Why Jim Rogers is Shorting India

In an interview at Wall Street Journal’s Livemint, the legendary investor Jim Rogers says that he is shorting India…

I used to own tourist companies in India at a time. India should have had the greatest tourist companies in the world. If you can only visit one country in your life, my goodness, it should be India—it is an astonishingly spectacular place to visit. There is no place that has the depth of culture that India has. Yes, I have new reasons to short India—just read its newspapers everyday and you will see why.

The government goes from one mistake to another—no matter what the controls are, no matter how much the debt keeps rising, Indian politicians are only looking for scapegoats. Look at the latest thing with gold—Indian politicians want to blame the problems of their economy on someone else, and now it is gold. Gold is not causing India problems, but it is quite the contrary. Exchange controls in India are absurd, the regulations that India puts in place result in foreigners going through 70 loops before they can invest in India. Foreigners cannot invest in commodities in India.

India should have been among the world’s greatest agriculture nations—you have the soil, the people, the weather, but it is astonishing that you have not become one—it is because Indian politicians, in their wisdom, have made it illegal for farmers to own more than five hectares of land. What the hell—can a farmer with just five hectares compete with someone in Australia or Canada? Even if you put together the land in all your family, it is still not possible to compete. Much as I love India, I am not a fan of its government. Every one year, they (Indian government) come up with more reasons for me to be less optimistic about that country.

India’s major equity benchmark the BSE 30

The more a country’s economy becomes politicized and the more their government engages in bubble blowing activities resulting to inflated asset prices, this usually makes for an attractive ‘short’ opportunity.

Video: Ron Paul and Jim Rogers on bankrupt governments: They will use intimidation, force and guns

At the recent Sovereign Man Workshop, former US congressman Ron Paul together with the legendary investor Jim Rogers talks about what to expect from desperate bankrupt governments 

Some noteworthy quotes: (video courtesy of the Sovereign Man)

Ron Paul: I would expect that there would a lot more chaos to come and it will not be limited to Europe. I think it will be a worldwide phenomenon 

Jim Rogers: They won’t take our bank accounts…they will take our retirement accounts.

Ron Paul: They will do what I think is necessary, they will use force and they will use intimidation, they will use guns because you can’t challenge the state’s right to control the money

Video: Jim Rogers is Very Worried About 2013

The legendary investor Jim Rogers recently interviewed by the Reuters. (courtesy of JimRogersChannel).

Some interesting highlights:

-EU rescue will “absolutely not” work.
-I’m very worried about 2013, more worried about EU in 2014
-I’m worried about "everybody" in 2013
-US has recession every 4-6 years; 2013 is after elections and between 4-6 years, so US will have a slowdown on 2013
-Next time there will be a US slowdown, the problem will be a whole lot worst
-Recession is coming and it’s gonna be worse
-Raising taxes will make things worst, US needs to cut spending “with a chainsaw”.
-US should be cutting taxes and spending
-China has been trying to slowdown the economy for three years; by design, by purpose
-Problems in US and America in 2013: When two of the world’s largest economy is having problems, everyone will get affected
-I don’t know anything "safe"
-Generally short stocks, long commodities.
-Owns Swiss franc, Japanese yen and Chinese yuan
-Interested in agriculture
-Owns gold and would buy more gold when prices fall
-Can’t "conceive" of the current prices of technology stocks
-"Most exciting thing I know is Myanmar" (like China in 1979)
-North Korea is going to merge with South Korea in next 5 years.

Jim Rogers seems in the same camp of Dr. Marc Faber. Dr. Faber sees 100% chance of a global recession in 2013 and even a potential market crash ala 1987.

Video: Jim Rogers says QE 3.0 could be Disguised

Legendary investor Jim Rogers says in this interview that the US Federal Reserve will engage in QE 3.0 when events get worst but will likely disguised it;

They may disguise it, they may call it cupcakes

Since governments are political entities, then they employ politics even in the way they communicate to the public.

A good example is the political language called doublespeak which Wikipedia defines as

language that deliberately disguises, distorts, or reverses the meaning of words. Doublespeak may take the form of euphemisms (e.g., "downsizing" for layoffs), making the truth less unpleasant, without denying its nature. It may also be deployed as intentional ambiguity, or reversal of meaning (for example, naming a state of war "peace"). In such cases, doublespeak disguises the nature of the truth, producing a communication bypass.

Quantitative Easing or credit easing policies is essentially money printing which is an example of euphemism or doublespeak.

So yes we could expect another doublespeak in terminologies applied for the next round of money printing or inflationism.

Gold at $1,500 Settles the Jim Rogers-Nouriel Roubini Debate

Celebrity guru Nouriel Roubini has been dead wrong. Prolific investor Jim Rogers has been spot on. They had an impassioned debate in November of 2009.

Professor Roubini earlier said of gold prices,

Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,” Roubini said.

Professor Roubini represents the mainstream econometric model based analysis whom has constantly failed to predict the markets accurately.

As Professor Robert Higgs points out, mainstream (academia) thinking has [bold highlights mine]

little interest in the search for truth, however one might understand or pursue it. To them, their research and publication amounted to a game in which the winning players receive the greatest rewards in salary, research funding, and professional acclaim. They understood that because of cloistered academic inbreeding, economists at the most prestigious universities consider the “smartest guys” to be those who employ the most advanced, complex, and incomprehensible mathematics in their “modeling” and “empirical testing.

Gold’s record price surge has been nominal based.

Economist John Williams, who uses the old methodology (1990 CPI) to compute for inflation, says that gold is still far away from reaching its inflation adjusted high in 1980s.

The USAWatchdog quotes economist John Williams (bold highlights original)

In a recent report, economist John Williams of Shadowstats.com contends a declining U.S. currency is reflected in spiking gas prices. Williams’ said, “. . . the primary problem behind higher oil and gasoline prices is the Fed’s efforts at dollar debasement, but few in the media are willing to blame the Fed . . . Also hitting the dollar, though, are increasing instabilities in and ineffectiveness of political Washington, D.C., as viewed by the rest of the world.”

Williams says gold and silver are nowhere near their former inflation adjusted highs of 1980. Back then, gold hit $850 per ounce and silver $49.45 per ounce. To truly equal that price in today’s inflated money, gold would have to be “$8,331 per troy ounce” and silver would have to be priced at “$485 per troy ounce,” according to Williams’ recent calculations.

Yet Gold’s record price surge isn’t only a US dollar dynamic but against global currencies.

The following charts from gold.org shows of gold trends in different currencies since 1998

Euro

Yen

Pound

South African Rand

Australian Dollar

Canadian Dollar

Indian Rupee

G-5 basket

In my view, surging gold in all currencies seem to be validating Voltaire’s observation—Paper money eventually returns to its intrinsic value ---- zero.

The blunt way to say this is that zero extrapolates to hyperinflation.

Again, all these mainly depend on the prospective actions of global governments, most especially the US Federal Reserve.

Jim Rogers Versus Nouriel Roubini On Gold, Commodities And Emerging Market Bubble

The celebrity guru strikes again!

Mr. Nouriel Roubini, whose shot to fame and stardom came after accurately predicting last year's crisis and has been media's du jour favorite gloom spinmeister or otherwise known as "Dr. Doom", recently predicted that every assets, including commodities and emerging markets stocks are in a bubble!

Mr. Roubini's captivating 'one size fits all' theory for this forecast is based on the US dollar as the "mother" of all carry trade.

In a recent column at the Financial Times Mr. Roubini wrote, ``Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions."

Portraits from Bloomberg

Hence he predicts a massive recovery of the US dollar, as every asset class anchored to the carry trade collapses.

It would seem that the 2008 financial crash functions as Mr. Roubini's operating paragon from which this call has been predicated (Anchoring bias?).

Bloomberg recently interviewed commodity king Jim Rogers, who dismissed Mr. Roubini's prediction.

According to Bloomberg,

``Many commodities are still down from record highs and equity markets aren’t on the brink of collapse, Rogers, chairman of Singapore-based Rogers Holdings, said in an interview on Bloomberg Television today. The price of gold will double to at least $2,000 an ounce in the next decade, he said.

“What bubble?” Rogers said, when asked if he agreed with Roubini’s view. “It’s clear Mr. Roubini hasn’t done his homework, yet again.”

``Rogers countered Roubini’s arguments by saying that Chinese stocks and sugar, silver, coffee and cotton have all dropped from their historical highs by at least 50 percent.

A sample of commodities (sugar and cotton) cited by Mr. Rogers are far from their all highs, as seen from the chart above courtesy of Moore Research Center.

One must note that the above charts exhibits nominal and not inflation adjusted prices.

Again from Bloomberg, ``When asked if gains made this year pointed to a bubble, he said: “It’s not a bubble if something is up 100 percent this year, but down 70 percent from its high. That’s not a bubble, that’s a good year. That’s a great year. Maybe it’s too high for this year, but that’s not a bubble.”

``“I suspect it’s going to go over $2000 some time in the bull market, but depending on what happens in the world it could go much, much higher,” Rogers said. “The old high, back in 1980 adjusted for inflation, would be over $2000 now, just to get back to the old high. So we’ll certainly get there some time in the next decade.”

``“I don’t know any emerging market stock markets that are so high I’d call them a bubble,” Rogers said. “They’re certainly all up a lot, maybe they’re too high, but being too high is not a bubble for anyone who knows financial markets.”...

``In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in U.S. bonds."

You can watch the video of Jim Roger's interview here

Meanwhile Mr. Roubini countered Mr. Rogers' objection by saying that gold at $2,000 is "utter nonsense".

According to Bloomberg, ``There is no inflation or “near-depression” to drive gold prices that high, Roubini said today at the Inside Commodities Conference in New York. If a severe depression came to pass, with investors buying canned goods and hiding out in log cabins, “maybe you want some gold in that scenario,” Roubini said.

``“Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense,” Roubini said. Gold rose to a record $1,098.50 today in New York on speculation that central banks and investors will purchase the metal to hedge against a declining dollar...

``“It is very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand,” Roubini said. Prices are “in part” a bubble, Roubini said.

``Roubini predicted in 2006 the financial crisis that spurred more than $1.6 trillion of credit losses and asset writedowns at global financial companies".

As you would note, media highlights on Mr. Roubini's favorable call but ignores his glitches and miscalls.

Earlier this year Mr. Roubini predicted stagdeflation, a continuing rout in asset markets including oil. According to Bloomberg (Jan 20th), ``Nouriel Roubini, the New York University professor who predicted last year’s economic and stock market meltdowns, said oil prices will trade between $30 and $40 a barrel this year.

“I see oil remaining throughout 2009 in the range of $30 to $40” a barrel, Roubini said in Dubai today."

In an earlier post we noted how Mr. Roubini hit only one out of several calls,see earlier post Wall St. Cheat Sheet: Nouriel Roubini Unmasked; Lessons, yet managed to harvest media's attention.

Going back to Mr. Roubini's theme of the US Dollar Carry. Here is why we are in the camp of Jim Rogers.

1. Past Performance don't guarantee future results.

Last year's carry trade paradigm had been based on financial institutions, such as the shadow banking system, and foreign banks (as Iceland and parts of Europe) which leveraged on the currency arbitrage.

Today, hardly the same parties or sector appear to be engaged in the said arbitrage activities considering their debilitated conditions.

Next, it isn't the carry trade that brought down the house in 2008, it was the US housing bubble. The carry trade only exacerbated on the downturn.

2. Barking At the Wrong Tree.

It isn't just private sector speculation as Mr. Roubini sees it, but governments' "speculating" as well.

The recent sale of half of IMF's gold stash to India (Bloomberg) came as surprise to the market whom expected China to do the bidding.

To add China has been engaged in a buying spree of commodity assets globally as seen by the World Bank table above.

In short, the governments of emerging markets have in themselves been "speculating".

Of course we'd like to add that these speculative activities isn't myopically based on "animal spirits", because there are underlying geopolitical and monetary dimensions in these.

3. US dollar carry isn't likely to be a major factor.

Given the massive deficits and the monetary inflation engaged by the US, it would be naive or blind allegiance on the side of professional investors to discard the risks of higher interest rates by taking large positions for such arbitrage.

4. Money is neutral.

Mainstream always view money as a seeming constant where additional inputs of money are deemed as not to have an impact on the supply and demand balances. This is evident on Mr. Roubini remarks "very hard to justify oil going from $30 to above $80 based only on the fundamentals of supply and demand"

Mr. Roubini underestimates the impact of the global reflation efforts by collective governments on global economies. Moreover, Mr. Roubini reflects on the mainstream view which have been moored upon the US as still the key engine of global growth.

Yet apparently Mr. Roubini sees today's higher commodity prices as having little impact on inflation, he says, there ``is no inflation or “near-depression” to drive gold prices that high"


On the other hand, Bespoke Invest sees inflation on the horizon, ``Over the last ten years, trends in the CS have often preceded moves in the CPI. So when the net reading in the CS rises, increases in the CPI are typically not far off. Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don't be surprised if upcoming inflation reports come in on the high side of expectations."

5. Wrong Models/Apples And Oranges

Gold isn't likely to rise during a deflationary depression (a view which Mr. Roubini leans on).

To argue for gold's strength on a Great Depression paragon misses the point that the US dollar then operated under a quasi gold standard. Thereby the rush to the US dollar equaled the rush to gold. That would be comparing apples to oranges today.

Gold doesn't serve as a medium of exchange for the consuming public today, but is still used as reserves by central banks. So gold's strength will be magnified by an inflationary depression and not during deflation.

In contrast to Jim Rogers who says Mr Roubini hasn't done his homework, Mr. Roubini's call would seem like an attention generating act.

An oversimplified theme which connects to the prevailing bias, appeals to the public. Publicity matters more than the content.

Jim Rogers: 10 Tips For A Successful Life

In his newest book, the legendary investor Jim Rogers shares his wisdom as legacy to his daughters and to the public.

From LewRockwell.com:

``A Gift to My Children: A Father's Lessons for Life and Investing (Random House, 85 pages, $16) is Jim Rogers' love letter to his daughters, Happy and Baby Bee. Reminiscent of The Autobiography of Benjamin Franklin, which was also written by a father to his child, Rogers' book is full of no-nonsense, unsentimental fatherly advice.

``This charming volume captures a father's voice – loving, direct, and sometimes stern – and amplifies his message for all to hear.

``Among Jim Rogers' best advice:

1. Conduct your own research and trust your own judgment.

2. Focus on what you yourself love.

3. Be persistent.

4. Broaden your horizons and see as much of the world as you can.

5. The most important thing you can learn is how to think and question everything you hear.

6. Study and learn from history.

7. Master more than one language – and make sure one of them is Mandarin.

8. Don't panic.

9. Take care of yourself and don't neglect the sunscreen.

10. Remember that boys need girls more than girls need boys.

Shopping For Farmland?

An ocean of money from global central banks is about to flow into commodities which should trigger a boom.

And as legendary investor Jim Rogers predicted, ``Power is shifting now from the money shifters, that got us to trade to paper and money, to people who produce real goods, whether it is agriculture or mining or whatever. This has happened many times in history, what you should do is become a farmer, or you should go and start a farming network. That’s what you do, because in the future the farmers are going to be one of the best professions you can possibly have."

And farming as the next sunshine profession should also mean a boom in farmlands.

And where are the best priced farmlands?

According to the Economist, ``FARMLAND has outperformed the property market in many countries. Investors rushed into agricultural land as food prices soared, helping to push up prices. A hectare of farmland in England increased by 16% (in sterling terms) in the year to January 2009, according to a new report by Knight Frank and Citibank. And even against a resurgent dollar this equates to $17,100 a hectare, the highest among the countries shown. Canada looks a bargain by comparison with neighbouring America: prices are around a tenth of the $11,000 a hectare paid in Ohio. The prospects for eastern Europe are bleaker, thanks to poorer infrastructure and economic prospects. Farmland in Ukraine fell by 75% to $125 a hectare."

The economist chart above doesn't cover much of farmland prices in emerging markets.

Yet not all farms are equal-there will always be the issue of infrastructure (farm to market), accessibility to water, government regulations, soil quality or structure, climate, security and etc...

Jim Rogers: Destruction of America as the World's Most Powerful Nation and Farming Boom

Once again the sensational Jim Rogers at CNBC last March 2 2009...

(hat tip: Jim Rogers Channel)

Some noteworthy excerpts...

``I think it’s astonishing they’re ruining the US economy, the ruining US government, the ruining the US Central bank and their ruining the US dollar, I mean this is…you’re watching in front of our eyes, very historically which is basically the destruction of New York as a financial center and the destruction of America as the world’s most powerful country."

``Power is shifting now from the money shifters, that got us to trade to paper and money, to people who produce real goods, whether it is agriculture or mining or whatever. This has happened many times in history, what you should do is become a farmer, or you should go and start a farming network. That’s what you do, because in the future the farmers are going to be one of the best professions you can possibly have."

Jim Rogers: 2009 Preparing For the Worst

Jim Rogers outlook for 2009 in an interview at Bloomberg (hat tip Barry Ritholtz )

Some interview highlights:

-This is probably gonna be the worst since the second world war…it’s gonna be very bad for all of us.

-In 1929….the politicians around the world started to make horrendous mistakes which turned it into a Depression, it would have been a normal recession otherwise…everybody got into act and that seems to be happening this time too.

-I am certainly prepared for the worst and if it happens I hope I take the appropriate actions…

-Our new President Mr Obama has said…he is going to tax capital. This is a period where the world is desperately short of capital what a genius! And then he is going to protect America, protectionism lead to the great depression in the 1930s, so we’ve got a man now who says, he is in favor of protectionism and taxing capital. If that happens then…it’s all over.

-[on world economic order] If America continues to make mistakes you’re gonna see that quick a transition.

-I did move to Asia because I see enormous opportunities there…I am convinced that China is the great country of the 21^st century.

-The American government is printing gigantic amounts of money, that in the ends is going to be the worst problem…it has led to inflation and in some cases to runaway inflation

-Faith is a terrible way to invest…I hope I don’t invest on faith, at least invest on facts.

-I like to own things forever

-Oil is going to make a huge comeback when it does. The international energy authority, who makes the studies of much of every oil field in the world came to the conclusion that oil reserve are declining at the rate of 7% a year…in 15 years there won’t be any oil left! Unless somebody discovers a lot of oil quickly at very accessible areas, the price of energy has to go to the roof again!

-Basically agriculture is agriculture and the force of one affects the other…so they are interconnected but maybe not directly

-You know, we have now nearly a shortage of everything in agriculture…shortage of tractors, tractor tires, fertilizers, seeds, farmers…

-I see a rally for awhile into 2009…then I expect to see more problems again in the markets into 2009. So, I am holding off these things as prices go up, I hold off buying if I see selling climaxes again or panic selling then I’d probably buy more.

-the last bubble left…the Federal Reserve is buying bonds, everybody’s pumping bonds like crazy, it’s clearly a bubble.

-The best way to buy China is to buy commodities, because you don’t have to worry about corporate governance or money supply…

-Mao Tse Tung ruined agriculture. The Chinese government is now spending hundreds of billions to repair agriculture, infrastructure, rebuilding China….

-Many areas of the Chinese economy which are going to be unaffected by the recession in the West, they won’t care what happens in the West.

-I wish they [Chinese Central Bankers] were running our central bank instead of Dr. Bernanke who doesn’t have a clue what’s going on. So far the Chinese have done a better job.

More Compelling Evidence For An Inflection Point in Commodities!

``We have had 8-9 periods of forced liquidation over the past 100-150 years wherein everything was liquidated without regard to fundamentals. This is such a period…Historically the things which have come out best on the other side are things where the fundamental have been unimpaired. Commodities are the only thing I know with unimpaired fundamentals…The cyclical demand for commodities may slow, but the secular supply will be badly affected so the commodity bull market will last longer and go further in the end-Jim Rogers, Commodity Bull Market Will Last Longer”

In last week’s A Fear Driven Meltdown, we described how commodities have been pummeled on the account of forcible selling.

As we wrote, ``The meltdown has been focused on the assumption of a dramatic decline of global demand. They seem to forget that with the current credit crisis, many of the planned projects will be put on hold or shelved or cancelled, giving way to constriction of supply. If supply falls far larger than the rate of decline in demand then you end up having lack of supply thus higher prices.”

A report from Danske Bank recently validates our premise (emphasis mine), ``But now another side-effect of the ongoing financial crisis and slide in commodity prices is emerging in the form of an increasingly serious negative impact on the supply of commodities and investment plans. Based on cost estimates from analysts Brook Hunt and the lowest prices we have seen in recent weeks, it would appear that up to 50% of world aluminium production, 30% of world nickel production, 10% of world zinc production and 5% of world copper production are now running at a loss. Since the summer there has been a massive shift in cash flow at metal producers, which have gone from raking in profits to producing at a loss.”

When selling prices of commodities fall below the cost of production, losses will account for reduced supplies and eventually prices will have to readjust higher.

Even farmers are getting squeezed by higher credit cost, declining value of land as collateral, and declining commodity prices, the following excepts from Bloomberg,

``The credit crunch is compounding a profit squeeze for farmers that may curb global harvests and worsen a food crisis for developing countries.

``Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago, who has advised farmers, food companies and investors for 29 years. Harvests of corn and soybeans also are likely to fall, Basse said.

``Smaller crops risk reviving prices of farm commodities that sank from records in 2008 after a six-year rally that spurred inflation and sparked riots from Asia to the Caribbean. Futures contracts on the Chicago Board of Trade show wheat will jump 16 percent by the end of 2009, corn will rise 15 percent and soybeans will gain 3 percent…

``The number of hungry around the world is at risk of increasing as the financial crisis cuts investment in agriculture and crops, said Abdolreza Abbassian, secretary of the Intergovernmental Group on Grains at the United Nations Food and Agriculture Organization in Rome. The total increased by 75 million last year to 923 million, the UN estimates.

``In Brazil, the world's third-biggest exporter of corn after the U.S. and Argentina, production may fall more than 20 percent because farmers can't get loans to buy fertilizer, said Enori Barbieri, a National Corn Producers Association vice president. The nation's coffee harvest, the world's largest, may drop 25 percent for the same reason, said Lucio Araujo, commercial director at farmer cooperative Cooxupe, located in Guaxupe….

``Minnetonka, Minnesota-based Cargill and Decatur, Illinois- based Archer Daniels, the world's largest grain processors, are among the crop buyers to halt financing for growers in Brazil, said Eduardo Dahe, who represents the companies as president of the National Association of Fertilizer Distributors…

``In Russia, loan rates for farmers have jumped by half in some cases to more than 20 percent in the past few months, Arkady Zlochevsky, president of the Russian Grain Union, said in an interview earlier this month…

``The value of the collateral farmers use to secure loans -- crops and land -- is diminishing. Lenders are demanding more equity for farm loans used to run operations or acquire land and equipment.”

The contraction in supplies of the base metals and soft or agricultural commodities strongly suggests of an imminent inflection point in the commodity markets.

The high profile market savant Jim Rogers in a recent Bloomberg interview screamed for a buy in Agriculture (see video Jim Rogers: Massive Inflation Ahead, Buy Agriculture!)

And we shouldn’t forget that commodity markets move in secular waves see figure 4.

Figure4: Moneyandmarket.com: Long Term Commodity Moves

To quote Sean Brodrick of Moneyandmarket.com (highlight mine),

``The upswings, or commodities supercycles, can last 20 to 25 years, according to Morgan Stanley’s research. And if the current one follows the pattern, we have many years to go before it plays out. The key drivers are the rapid economic growth in China and infrastructure spending in other large emerging markets.

``The fact is, commodity bull markets can see corrections that will make your head spin.

``Other commodity bull markets in modern history — roughly spanning 1906 to 1923, 1933 to 1955 and 1968 to 1982 — lasted more than twice as long as the current run. They included some sharp corrections before they ran their course, suggesting that the current drop, however sharp, could be temporary.”

So with global central banks collectively running the printing presses on a 24/7 basis into the global financial system plus the severity in the contraction of supply gaining an upper hand vis-à-vis the degree of decline in demand, fundamentals suggest a likely forthcoming inflection point on the commodity markets.

And perhaps a rising commodity markets will reinforce the recovery in global equity markets.

Jim Rogers: Massive Inflation Ahead, Buy Agriculture!

This great Bloomberg interview with Jim Rogers..

Some noteworthy end quotes...

On Government bailouts: ``It’s like an insanity if you ask me; the government is going to run the banking system now? They can’t even run the postal. What’s wrong with these people? Why don’t they just let them fail and start over? That's the way the system works out."

On market bottom: ``When people say it is over and when we you see more bad news and stocks stop going down. But when they go up on bad news, that’s when we are gonna hit bottom. We are not gonna scream I don't know." (Hat tip: goldofthemoon)