Strategy: Jim Rogers
He’s bought a Chinese financial company, remains long the yen and thinks Korean unification will happen soon.
Jim Rogers has led a life that many investors would love to emulate. Growing up as a “poor boy from Alabama” Rogers worked hard as a student, graduating with degrees from Yale and Oxford Universities.
He then worked even harder starting a career on Wall Street. In 1970, he joined investment bank, Arnhold and S. Bleichroder, where he met one, George Soros.
Rogers and Soros went out on their own in 1973, founding the Quantum Fund. During the next ten years, the fund gained 4200% compared with the S&P 500’s 47% advance.
That allowed Rogers to retire at the age of 37. Well, not quite retire. He travelled around the world twice, once by motorbike and the other by car, and wrote books about the trips.
“Retirement” also allowed Rogers to invest his own money. And it’s here where he’s made some now famous calls. Rogers was talking up China’s long-term prospects in the 1980s. It’s hard to realise now but very few saw China’s potential during this period.
In 1998, Rogers founded a commodities index on the view that commodities had bottomed and were set for a multi-decade bull market. To say this call was spot on would be an understatement.
Rogers has made money from a host of other eclectic investments, including from stocks in the African nation of Botswana, where he recognised this country’s potential early on.
Rogers is a deeply contrarian investor with an almost innate curiosity and ability to sought facts from noise.
It seems he’s passing on these values to the next generation. Rogers moved his family from New York to Singapore in 2007 because of his belief in the long-tem rise of Asia. But also so his first daughter could learn Mandarin to prepare for the future.
It’s in Singapore where Asia’s Money Masters caught up with Rogers.
Jim Rogers is never shy about offering an opinion. “It’s ironic that in “Red” China, you’ll have the market playing a larger role. On the other hand, in the West, people seem to be saying that the government is smarter than the market”, he says.
His words are backed by action, having recently bought a Chinese financial company given the government’s apparent seriousness in opening up the financial sector. Rogers’ strategy of buying long-term, transformational change has served him well ever sine he founded the Quantum Fund with Geroge Soros in 1970 and delivered unheard returns of 4,200% over 10 years.
Now retired in Singapore, that hasn’t stopped him from hunting the next big investment opportunities. He thinks he’s found them in China, in the near-term prospects of Korean unification and in Myanmar.
Here's Asia's Money Masters' extended interview with Jim Rogers:
Asia's Money Masters: You've been warning for some time that central bank actions since 2008 have created even deeper problems for the world and a more serious day of reckoning will come. Does that remain your base case?
Jim Rogers: Yes, absolutely. We have all of the major central banks printing staggering amounts of money. We've got this artificial ocean of liquidity out there and it has to end someday. When it does, it’s going to be very difficult.
The US is cutting back stimulus while Japan and the EU may be providing additional QE at some point this year. How do you see that playing out? Are emerging markets where the main risks lay?
JR: The main risk lies with the US. The US market is near all-time highs. Emerging markets have gone down a lot already. The risk though is everywhere, including emerging markets.
What kind of triggers are you looking for to indicate that a deeper correction may be near?
JR: A deeper correction may have already begun for all I know, though I doubt it. Usually what happens when markets peak is that you have marginal players going down first.
We're already starting to see some marginal countries and marginal companies decline. If you look at the advance-decline statistics in the US stock market for instance - the indices are making highs but the number of stocks which are making new highs has collapsed.
When a more serious correction starts, what will probably happen is that the US will continue to cut back QE, but at some point it will cause enough pain that the politicians and bureaucrats will give in and stop any further tapering. At that point, markets will breathe a big sigh of relief, resume their climb and then it may even turn into a bubble. At that point, it’ll be the last hurrah.
Let's move on briefly to one of the issues making headlines: Ukraine. Markets have largely shrugged off that issue. Is there a chance that they’re wrong and this could turn into a deeper crisis?
JR: Well, of course. You go back and look at the history of war - people make mistakes. Country “A” makes a mistake and then country “B” makes a mistake, and all of a sudden, you have people at war. In 1914 for instance, within 6-8 months of the war beginning, people all over the world, including Europe, were saying: “How did we get into this?” That was because it was so absurd what was going on. And yet they didn’t manage to end the war until four years later.
That’s often how things start. It could happen in Ukraine, but I doubt it. The US and EU don’t seem interested in engaging in a war over Ukraine. But you never know. Throughout history people have bungled themselves into wars even though nobody really wanted them.
Even under a worst case scenario such as war, Russian equities look cheap at around five times earnings. Are you a buyer of Russian equities at these levels?
JR: Yes, I bought some in March. And I’ll probably buy more before long.
Turning to Asia and the economy everyone's focused on: China. You’re on record saying that the economic slowdown in China won't get too serious. Do you maintain that view?
JR: I'm not sure where I said that. Where did I say that?
You've said that there’s unlikely to be an economic crash like famed short-seller, Jim Chanos, and others are forecasting.
JR: That’s not right. What I’ve said is that China is the next great country in the world. There’ll certainly be setbacks along the way.
In the 19th century, as America was rising to power, it had 15 depressions, a horrible Civil War, massacres in the streets and little in the way of human rights. And yet, America turned out to be pretty successful.
China will have setbacks along the way. I have no idea what, when, why or how. But China is the largest creditor nation in the world and if and when they have setbacks, I would rather be investing money with creditor nations such as China than debtor nations.
I have frequently said that we’ll have people in the real estate business going bankrupt in China because the government is trying to cool off that particular sector. But on the other hand, other parts of the Chinese economy will continue to do extremely well.
If you’re in agriculture in China, you won’t know whether real estate speculators in Shanghai are going broke because you’ll be too busy making money yourself.
Would you suggest that property and local government are the areas which are most vulnerable in China right now?
JR: Well, Beijing has said they want property prices to come down.
They've been saying that for a long time without much long-lasting success…
JR: They’ve said it several times and every time in the past, when prices were softening, property executives went begging to Beijing and Beijing loosened policy again.
This time, as property prices weaken, the government is again loosening policy. But there will come a time where it doesn't matter how much authorities ease policy: if you have excess supply, you have excess supply. And you won’t be able to do anything about it. We’re certainly getting closer to that point now.
Conversely, the areas which should still thrive even in an economic downturn: your focus has been on agriculture, water and tourism – do they remain the best structural plays on Chinese growth?
JR: Those are some of them. Beijing has said that it will let market forces play a greater role in the future. That’s fabulous as far as I’m concerned. It’s ironic that in ‘Red” China, you’ll have the market playing a larger role. On the other hand, in the West, people seem to be saying that the government is smarter than the market.
But in China, healthcare is going to get a gigantic push. Railroads, cleaning up pollution and farming too. The government has also said that it’ll open up the financial sector. I think it’s serious about this and I bought a few shares in a financial company recently as a consequence.
Let's turn from the world’s second largest economy to the third: Japan. You've been a critic of Abenomics. Can you outline exactly why?
JR: Japan has decided that it’s going to debase the currency and drive up inflation. That’s never been a good solution to any problems throughout history. Politicians sometimes can go: “We can control inflation” or “we can control currencies”. Sometimes that can work in the short-run but it’s never worked in the long run.
Shinzo Abe says he has three arrows to get the Japanese economy back on track. The third arrow is probably going end up in Japan's back.
I own Japanese shares because of Mr Abe’s money printing policies. But I think everyone is going to look back at this period in 10-15 years and say: “that’s what finally ruined Japan”.
As you mention, Japan is trying to depreciate the yen. Do you see the yen heading a lot lower over the next 12 to 24 months?
JR: I’m long the yen at the moment, mainly because there are such huge short positions in the currency—one of the highest short positions that I’ve ever seen. As I mentioned, I’m not particularly optimistic about Japan or the yen in the long term, but for the moment I remain long the yen. Eventually I’ll sell my yen because the current easy money policies in Japan cannot continue indefinitely.
Note that I’m also long the US dollar even though I’m not particularly optimistic about the long-term picture there either. But I expect more turmoil – certainly currency turmoil. And in periods of currency turmoil throughout history, the US dollar and yen have been perceived as safe havens. They’re not safe havens, but I suspect that they will again be among the currencies which people will go to for safety during the next serious downturn.
It would be remiss of me not to touch on some of your favourite themes in Asia, one being Myanmar. Is the Myanmar story still attractive?
JR: Yes it is. There will be ups and downs in Myanmar. Right now, you have military problems with minorities in some parts of the country. There are bound to be other problems cropping up. It’d be awfully strange if a country which suddenly opened up after 50 years of economic decline didn’t have these kinds of problems. But I suspect they’ll prove to be temporary problems.
There are still doubts about whether the necessary constitutional changes will be made for the opposition leader Aung San Suu Kyi to stand for the presidency next year. Is that essential for further progress to be made in Myanmar?
JR: Certainly not in my view. There’ll be setbacks along the way and that may be one of them. Always when countries open up, things like this go wrong.
It’s interesting that you mention this issue. Myanmar’s constitution was actually written by Suu Kyi’s father. He included in the constitution that if you marry a foreigner, you can’t lead the country. Now, everybody is trying to blame this issue on the ruling military junta!
These kinds of issues are bound to come along and present more potential opportunities for investors.
How do you get exposure in Myanmar? There are a handful of stocks in Hong Kong and Singapore. Are there any alternative investments which can give you direct access to Myanmar?
JR: I don't know of any except to go to Myanmar and invest directly yourself. That’s not my game though.
I know they’re working to open a stock exchange but until that happens, there are limited opportunities for most of us.
Turning to your other top theme: North Korea. There hasn't been a lot of news out of there lately. As an investor, are you happy to sit and wait?
JR: Yes, I don't have any choice!
How do you foresee change eventually occurring in North Korea? Will it be via internal revolution, unification or something else?
JR: I expect unification within a few years. It will probably be the most exciting country in the world, once unification happens.
Who knows if I'm right about unification happening soon. But I’d remind you that Helmut Kohl—one of the most admired and respected German politicians of the past century—was asked in an interview in 1989: when will East and West Germany unite? He said, adamantly: “Not in my lifetime.” We all know what then happened in 1989 - the Berlin Wall fell and East and West Germany were united within a year of that interview. So, change can happen quickly.
There are already exciting changes taking place in North Korea which will shock a lot of people. You can take bicycle tours in North Korea now. You can take movie and art tours. There are all sorts of changes taking place.
South Korea’s president seems to be at least open to more engagement...
JR: Yes, there’s no question. But if you listen to American or Japanese propaganda, you’d think the North Koreans are wild savages with no concept of the rest of the world. That’s because the Japanese are against unification because they won’t be able to compete with a united Korea.
Americans are against unification because they’ve been against it for 60 years. They don’t know why they’re against it. But partly it’s because the US wants to keep troops in South Korea and obviously when North and South Korea unite, part of the deal will be that the American troops will have to leave. China simply won’t allow a united Korea with American troops sitting on its border.
Therefore, Japan and America are against the unification but the rest of the world will be for unification.
South Korea would stand out as the prime beneficiary of unification…
JR: With North Korea’s cheap labor and enormous resources, combined with South Korea’s capital and technology, it would certainly become a potent combination.
One final question on another pet topic of yours: commodities, and particularly gold. You’ve suggested that there’s more downside for gold in the short-term. Is the thesis there that the correction since 2011 hasn’t fully played out?
JR: That’s partly it. It was very abnormal what happened with gold – it had 12 years without a single down year. Gold hasn’t even had at a single 50% correction in at least 14 years. That’s very strange! Most assets correct 50% at some point, even in big bull markets. So the price action in gold is still abnormal, in my view.
Also, the fundamentals remain challenging. Indian politicians are blaming their problems on gold. At one point they were trying to force Indians to sell their gold. They may try that again. India has been the largest consumer of gold in the world for years and if the politicians get locals to sell their gold, who knows how low gold could go.
Gold bugs always focus on Chinese demand and they seem to ignore Indian demand…
JR: I know they do. People used to tell me that gold was “holier than thou” and that it would never go down in price. And I’d point out that India is the largest consumer of gold [ed: until recently when China took over that mantle] and it’s doing its best to get the gold price down. Well, these people would look at me like I’d flown in from Mars!
We should expect a 50% correction towards US$1000 an ounce then?
JR: I don't know if there’s going to be a 50% correction. I'm just pointing out that the fact that there hasn’t been such a correction during this gold bull market is abnormal.
I am not buying gold at the moment. In my view, there are still too many gold “mystics”- people who haven’t given up despite the declining price. If we have a big wash-out where these mystics give up, then gold will be a great opportunity. Until that happens, I don’t see that gold has quite bottomed.
But I hasten to say that if America and Iran go to war, or something else similar, I’ll be buying gold even if the price is going up. It partly depends on how the world evolves.
Either way, I do expect another chance to buy more gold over the next two to three years and I hope I’m smart enough to act.