Tuesday, June 4, 2013

Jim Rogers on the looming crisis

I don't know how to take Jim Rogers. Though a graduate of Yale and Oxford, he has no advanced degree, but that shouldn't necessarily count against him as an interpreter of the economic and financial scene.

Since economists routinely disagree about even the most basic issues, there is scope for others who have some expertise in finance and related areas to make their contributions. And, arguably, pragmatic freelance investors – whose only concern is to get things right (primarily for their own portfolios but also for reputational reasons) – have an important role to play in the public debate.

And Rogers has no doubt been a phenomenally successful investor. This means something, even if you put it down to mere luck and commonsense.

His ideas are worth looking at not because they are interesting but because they have an 'emperor's new clothes' quality – and (who knows?) he may just be right.

His economic assumptions are not doctrinaire, in the sense that they appear to have been arrived at independently. They just happen (as Rogers has himself observed) to correspond with some of the main tenets of the Austrian school.

He emphasizes the relevance of morality to the markets, but not in a naïve or objectionable way, it seems to me.

So here are some extracts from a recent interview in which he talked (amongst other things) about morality and the markets and the coming crisis (as he sees it) for the US, Europe and Japan.


Félix Moreno: [You have written that] the US [is the] largest debtor in the history of the world.

Jim Rogers: That’s not an indictment, that’s a fact. If you consider it a negative fact, it’s an indictment. It happens to be a fact that it is the largest debtor nation in the history of the world. The debt is going through the roof, you know with all the shady rates. I do criticise it. I don’t like it. I’m an American citizen. I’m an American taxpayer, so I hate what’s happening with the debt situation in America. No nation in history has gotten itself into this situation and got out without a crisis. So I guess it is an indictment.

FM: Do you expect the US politicians to do something about the debt? To balance the budget any time soon?

JR: No, not at all. Not either the present politicians or future politicians. The situation is so dire that it would be almost impossible to balance the budget and pay down the debt without an enormous amount of pain. Now suppose that somebody could win an election on that platform – well within six months or a year or two, he would either be assassinated or give up because the people would say “wait a minute, we didn’t know it was this much pain. This is not what we had in mind” and he would be thrown out and his policies reversed. No it’s not going to happen until there’s a crisis or a semi crisis. That’s the lesson of history. Nobody gets out of this situation until there’s a crisis.

FM: What would you say to those that see the current situation as perfectly sustainable, especially in reference to the money printing, quantitative easing, etc.

JR: I would suggest that they get out a couple of simple history books and see if there has ever been a way out. For what it’s worth, there has not been and there won’t be. I suggest that they look it up. They don’t have to listen to people like me, look it up.

FM: Do you think that Bernanke and the Fed have an exit plan from QE and zero-rates?

JR: Mr Bernanke’s exit plan apparently is that he is going to leave his job. He doesn’t want to stick around for the hangover. He doesn’t want to be around for the consequences of what he’s doing. I don’t know if there’s an exit plan. If and when they stop it’s going to cause lots of ramifications in the market and lots of, perhaps even chaos, but certainly turmoil and upset. The only exit plan that he’s talked about is to let it all mature. That sounds wonderful, but it’s not very practical.

FM: It seems that the whole “let’s get out before it crashes” worked well for Alan Greenspan.

JR: Well, Alan Greenspan did get out before it collapsed, more or less, but if nothing else, history has figured out that he is a charlatan who didn’t know what he was doing in the first place.

FM: So you don’t think that they have an exit plan. Does that mean that you are in the inflation camp? Do you think that the crisis is going to come from high inflation like in the ‘70s and ‘80s, or are you in the deflation camp? That it will come through bankruptcies, banking collapses and debt defaults?

JR: Throughout history when you print staggering amounts of money, it has always led to inflation. Now, you can have an inflationary boom, an inflationary feel-good period, but usually the politicians just keep printing. No politician is going to run on a platform, or could get elected on a platform of “we are going to have pain”, so they are going to continue to print money. You know as Mr Bernanke is doing, the BoJ, the Bank of England, the ECB. They all say the same thing. They are all doing the same thing. So they are going to continue to print money. Eventually of course what always happens is that inflation gets higher and higher and then the bubble pops and you have deflation and harder times. But between here and there is a long way, because they are not going to stop printing money. That’s all they know how to do. It’s the wrong thing, but it’s all they know to do.

FM: ...[Y]ou give examples of banking crises where there were no bailouts. What is your opinion on the bailouts?

JR: It’s not supposed to work that way. You are not supposed to take money away from the competent people and give it to the incompetent so that the incompetent can compete with the competent people with their own money. That’s not the way capitalism is supposed to work. That’s not the way morality is supposed to work. I know politicians don’t care about morality. It’s not going to work. You see what happened in Japan. Japan has had two lost decades. Their stock market is down by 70-75% from where it was 23 years ago. This system has never worked.

In the 1920s America had this problem and America balanced the budget and raised interest rates... They had a terrible 18 months, but then they had the most exciting economic decade in American history. Scandinavia did the same thing in the early ‘90s. When the Japanese were refusing to let people fail, the Scandinavians let people fail. They had a terrible two or three years, but since then Scandinavia has been an extremely strong and exciting part of the world. This way (the bailout way) doesn’t work, and there are no examples of something like this having ever worked. It’s not going to work this time either.

FM: Some argue that a current example are the eastern European countries: Estonia, Lithuania, etc, who made big cuts within one year of the crisis and are now growing faster than the rest of Europe.

JR: There’s no question. You can look at other places: Iceland, Ireland – you know, the places that did take some pain have certainly done better than the places that denied reality.

FM: From the Spanish perspective, it’s certainly not better to have a lost decade or two by trying to postpone all the big budget-balancing hard work.

JR: You can postpone it all you want, but the problems just mount. There is no country in Europe that’s going to have lower debt this year than last year, or lower debt the next year than this year. Every one of them will run up the debt, instead of decreasing the debt.

FM: Do you expect the Euro to lose the currency wars? Which will fall down the cliff first? The yen, the euro or the dollar?

JR: It depends on what standard of measure you are talking about. The Japanese claim that they are going to print “unlimited” amounts of money. That’s their word, not mine. Unlimited amounts of money. I would expect the yen to go the furthest the fastest. But America has also said “wait guys, we’ll print a lot of money too” – though they didn’t say “unlimited”. And the British said “we should do it”. So I don’t really know. It’s a very good question, which one to own. I don’t own the yen, because “unlimited” is a pretty hefty amount of money. I grapple with this every day, which currencies to own. Believe it or not I was even contemplating putting money into the ruble – only because it seemed less flawed at the moment than these others.

FM: You seem to have had a change of heart recently regarding Russia.

JR: In recent months I have seen that Mr Putin and people in the Kremlin have changed their attitude. It will take a while for all this to sink in. They said for many years that they welcomed foreigners and capital, but they were lying. They shot you, they put you in jail, and they confiscated your wealth. But now Mr Putin seems to understand that he has to play by international rules, he cannot go on putting people in jail and taking their money. If he wants to play on the world stage he has to treat international capital, and domestic capital, in a proper way. You can ask me in 10 years if I got it right or not...