Jim Rogers: The American Dollar Is A Flawed Currency

Legendary investor Jim Rogers thinks the US economy & dollar is on sever decline. Check out this great article in the UK's Guardian newspaper:

Indiana Jones and the China crusade
by Nils Pratley

Jim Rogers, investment guru; co-founder of Quantum Fund with George Soros

The American dollar is a flawed currency and will collapse in value before the end of the decade, taking with it the prosperity of the American nation. Investors should be buying commodities - platinum, lead, wheat, sugar, oil, the sort of assets that haven't been fashionable for a quarter of a century or more. While you're at it, teach your children to speak Mandarin, the coming language of the 21st century. And don't encourage them to do an MBA: "Tell them to be a farmer and do a real job."

Such advice, if given by your regular financial adviser, would probably provoke a complaint to the ombudsman. The speaker, though, is Jim Rogers, a legendary Wall Street name. The Indiana Jones of finance - a nickname earned by virtue of two round the world trips in the name of grass-roots investment research - has become a multimillionaire by backing such views with hard cash.

In 1973, Rogers and George Soros founded Quantum, one of the first and most successful hedge funds. In Britain, the Quantum Fund is best known for making £1bn by selling sterling ahead of Britain's exit from the exchange rate mechanism on Black Wednesday in 1992, but Rogers' contribution came before then. He helped Quantum to return a 4,000% gain in its first 10 years and departed in 1980, staying a year longer than he had intended only because 1979 had been so profitable - he predicted the stock market crash of that year.

The "poor boy from Alabama" whose first job was picking up bottles at baseball games at the age of five, retired at the age of 37 a very wealthy man. He set about managing his own fortune and travelling the world, projects that have become virtually indistinguishable over the years. In the early 90s, Rogers travelled 65,000 miles roving the world by motorbike and related the tale in his first book, Investment Biker. Last year, he completed a second, Adventure Capitalist, which was the result of an even more ambitious journey: a three-year, 150,000 mile journey by custom- built Mercedes across 116 countries with his girlfriend, who became his wife along the way - in Henley-on-Thames, of all places.

Snake burger

Like the earlier book, it is part anecdote - what it's like to eat snake; what happened when he forgot about the bottle of vodka in the boot when trying to enter Saudi Arabia - but the heart is commonsense investment analysis built on firsthand observations. His philosophy is that you learn about a country from talking to brothel owners and black marketeers rather than government ministers.

In conversation, Rogers rattles along in similar style. He punctuates everything with American-style full disclosure of his personal holdings - "I'm short Citibank, incidentally," he will interject into a dissection of the rotten heart of the American stock market - and delights in challenging received wisdom. His central argument is that a new bull market has started that will match the fireworks seen in the dotcom-fuelled stock markets of the late 90s. This time, though, the bull market will be in commodities not shares. Rogers' reasoning is straightforward: raw materials are running out.

"There has been no great oil discovery in the past 35 years," he argues. "The North Sea has peaked. Alaska is in decline. Mexico is in decline. All these great oilfields are in decline. To anybody who thinks I am lying about this, I would ask: where is the oil going to come from?

China bull

"Mines deplete. Wells deplete. It's supply. In the 1970s, we had horrible economies around the world, but commodities skyrocketed despite those horrible economies because there was no supply. That is happening again."

How high is high? The nature of all bull markets, he argues, is that prices go higher than anybody would have imagined possible. "Nobody could ever have thought that Cisco could go to $75 [it had been $5 a few years earlier]. Who would have thought in the 1970s that oil could go to $40 a barrel - it was $2 a barrel in the 1960s," he says.

"Sugar in 1966 was 1.4 cents per pound. In 1972 - six years later - sugar was 66 cents. Who could have conceived that? For decades, it had done between one and five cents. If you had said in 1966 that it would go up 47 times they would have made you certifiably insane. But it happened."

Hand in hand with this faith in the value of commodities is a long-term confidence in China, whose appetite for raw materials has already fuelled a strong rise in commodity prices in the past 18 months. All the best capitalists live in communist China, he argues, and overseas Chinese are returning with their capital and expertise. He has employed a Chinese nanny for his one-year-old daughter. Mandarin will be the most important language in his child's lifetime, he thinks.

But even this China bull predicts a major economic slowdown there, with accompanying political unrest, very soon. In this, he is not wholly out of the line with the consensus thinking - City economists are currently debating whether China's landing, after a decade of extraordinary growth, will be hard or soft. Rogers' view is that it will be very hard, but will also represent a golden investment opportunity.

"I remind you of the last two times that China had to cut back an overheated economy," he says. "In the late 80s, it led to Tiananmen Square when things got out of control and the second time was in the mid-90s, when they had to devalue their currency. Sometime this year or next you will see headlines in the Guardian, 'Turmoil in China'. At that point, you buy all the China you can and all the commodities you can because that will be bottom of the consolidation in commodities and consolidation in China."

Buying in the face of prevailing hysteria is a principle that has served Rogers well over the years. Crisis in China - however serious it looks at the time - will merely mark the end of the first leg of this new bull market, he thinks.

"Remember," he enthuses, "that the second leg is wonderful, and the third leg is spectacular. In the fourth leg, there is dancing in the streets and in the fifth leg people are hysterical and everything is skyrocketing every day. We are nowhere near the second leg, much less the third, fourth and fifth legs."

His bearishness on the US dollar is predicated on economic fundamentals, notably the balance of payments. Alan Greenspan, the chairman of the Federal Reserve and Rogers' bogeyman-in-chief, has been printing money on an unprecedented scale and President George Bush has been spending it just as rapidly.

"The US owes the world $8 trillion," he argues. "We are the world's largest debtor nation by a factor of many times and our foreign debts are increasing by $1 trillion every 21 months. That's terrifying.

Dollar demise

"People need to understand about this major change in the world and about the demise of the US dollar. The US dollar is going the way that sterling went as it lost its place as the world's reserve currency. I suspect there will be exchange controls in the US in the foreseeable future. It will be a complicated and difficult currency."

Not that Rogers is a fan of many currencies. He says he has stakes in a dozen but has "no confidence in any of them". He expects the euro to fail eventually but holds some anyway because he judges it to be less flawed than the dollar. For the record, his daughter's assets are held in Swiss francs and gold, silver and platinum coins.

Unlike his old partner, Soros, who has devoted part of his vast fortune to opposing Bush's election campaign, Rogers stands wholly outside the political fray. He calls the US-led invasion of Iraq a "horrible, horrendous, unbelievable mistake", but thinks the Democratic candidate, John Kerry, would make his own mistakes. "They wouldn't be politicians if they knew what they were doing," he says, far from flippantly.

The balance of payments, and the looming dollar crisis, make the election result irrelevant, he argues: "Whoever is elected president is going to have serious problems in 2005-06. We Americans are going to suffer."

The CV

Born 1942, Alabama

Education Yale; Balliol College, Oxford

Career US army; co-founder, Quantum Fund; professor of finance, Columbia University Graduate School of Business

Family Married to Parker Paige with a daughter

Interests Henley royal regatta

More on Synthetic Long Positions

As previously mentioned, I entered a synthetic long stock position using options in Seabridge Gold.

As a recap, a synthetic long stock position is buying the calls and selling the puts to offset the cost the of calls. (If you don't know what calls and puts are, I suggest you read up on option trading. Options Made Easy: Your Guide to Profitable Trading is a good book).

With $60 I was controlling $1650 worth of stocks, or about 100 shares. On Friday, or about a week later, the stock was up just over a dollar, so I sold 2/3s of the call contracts and all of the puts. On the call side, I netted a profit of $0.40 or $40/contract and on the put side I netted an additional $0.35 or $35/contract. I actually closed out all the puts and kept only 1/3rd of the calls.

If I had closed out the position entirely I would've made about $70/contract or about 116% in roughly 1 week. As it stands, since I've liquidataed most of the position, I'm now in each call contract at almost cost and I'll recognize a total net profit when I exit the calls. Currently the calls are selling for $235.

Last friday was also Triple Witching Day, (the contracts for stock index futures, stock index options and stock options all expire on the same day) and historically the week after that in June has a tendency to ended lower. Thats why I decided to close out most of my position. If the stock market does move lower, I can re-enter the position at a cheaper price. If not, then I'll still make money on my existing call options.

If the stock drops, so long as I sell the calls before they drop under $10-$15, I won't lose any money. If the stock moves significantly to the upside, the Delta will move towards parity with the stock and I then get most of the upside.

Currently I'm in a good situation. Lots of upside potential with minimal downside risk!

On another note, BHP Billiton (BHP) and Anglo American (AAUK) are hitting new highs! I love my commodity stocks.

Hogs Pigging Out And An Ethanol Alternative

According to an article in the Wall Street Journal, the rush to produce ethanol has resulted in sharply higher prices for corn. Corn is used to feed cattle and pigs and as a result of the price increase, farmers are feeding their pigs trail mix, candy and Top Ramen noodles!

Besides trail mix, pigs and cattle are downing cookies, licorice, cheese curls, candy bars, french fries, frosted wheat cereal and peanut-butter cups. Some farmers mix chocolate powder with cereal and feed it to baby pigs. "It's kind of like getting Cocoa Puffs," says David Funderburke, a livestock nutritionist at Cape Fear Consulting in Warsaw, N.C., who helps Mr. Smith and other farmers formulate healthy diets for livestock.

California farmers are feeding farm animals grape-skins from vineyards and lemon-pulp from citrus groves. Cattle ranchers in spud-rich Idaho are buying truckloads of uncooked french fries, Tater Tots and hash browns.

In Pennsylvania, farmers are turning to candy bars and snack foods because of the many food manufacturers nearby. Hershey Co. sells farmers waste cocoa and the trimmings from wafers that go into its Kit Kat bars. At Nissin Foods, maker of Top Ramen and Cup Noodles, farmers drive to a Lancaster, Pa., factory and load up on scraps of the squiggly dried noodles, which pile up in bins beneath the assembly line. Hiroshi Kika, a senior manager at the company, says the farm business is "very minor" but helps the company's effort to "do anything to recycle."

Mr. Smith says he's paying about $63 to feed a single pig for five or six months before it goes to market -- up 13% from last year. His costs would be even higher if he didn't augment his feed with trail mix, which he says helps him save on average about $8 a ton on feed. This year, Mr. Smith has bought enough trail mix to feed about 5,000 hogs, and that will save him about $40,000.

Its only a matter of time before corn prices become too expensive for human consumption in the US. Already its too expensive for people in Mexico and being a major ingredient in their diet, thats having an inflationary effect on their lifestyle.

Rather than using corn-based ethanol, I wish the government would look into using vegetable oil instead. There are several kits available for diesel cars that allow the owners to switch to "used" vegetable oil whenever its available. In Southern California, there are companies like Socal Greasers that will fit your diesel car with a converter kit for a reasonable price.

So next time you stop by a fast-food place for a meal you can ask the manager for some of their used cooking oil. They have to pay to dispose of it and are usually happy to give it to you for free. It burns much cleaner than gasoline and your exhaust has a nice french-fry smell too!

BHP Billington Share Buy Back

BHP bought 1.5 million shares today. They report this on their website. Pretty amazing how much stock they've bought back. The stock buy backs along with their regular dividends and diversified commodity base makes them one of my favorite stocks. Plus the fact that everyone I know isn't harping on about them (like Qualcomm in 1999) makes it even more attractive.

Along with Anglo American (AAUK), these two are great commodity plays. Plus they're both down over 5% this week makes it a good time to jump in. I plan on holding both for a long long time.

As usual, do your own Due Diligence. If you don't know what that means or how to do it, put your money in ING Direct instead!

Today's market rebound was disheartening. Even though my portfolio is down on the whole, my invesrse S&P500 fund was up 7% yesterday. Now I don't know whether I should hold it or bail. On the other hand, if we saw another day like yesterday, I could exit and take my profits! But then gain, everyone else seems to be really happy with the rebound. I guess thats the closest we'll ever get to world peace. I'll take it ;-)

Friday Rant

I came across this article last night, 32 Reasons Why The Stock Market Will Jump This Year.

While its written as a serious prediction, I personally feel its more like a christmas wish list or a list of finalist answers at the Miss World Beauty Pagent!. Here are some of the gems

#1. Housing and Auto-manufacturing weakness will subside
Based on what? Major layoffs in both industries?

#5. Unemployment with stay at record lows.
Hmm...with the massive layoffs in Housing and Auto-manufacturing, you really think so?

#7. Inflation will continue to decelerate, with CPI averaging around 2.0%.
Hmm...ever since the minimum wage was jacked up, small business around where I live jacked up the price of everything along with it. That doesn't sound like low inflation to me. Anyone who thinks that CPI is an accurate measure of inflation makes way too much money to begin with. Once you take out all the factors that cause inflation, of course you'll be left with 2%. What a doofus.

#11. The US Dollar will firmer up and even maybe become stronger
With almost all the worlds major currencies strengthening against the USD how is this going to happen? Oh yeah, Bank of Japan is enforcing a weak Yen policy. And of course the USD will strengthen against the Iraqi Dinar! And with China owning a Trillion USD do you think a strong Dollar is actually in our interest????

#12. The U.S. budget deficit, which is currently 1.5% of GDP, well below the 40-year average of 2.3% of GDP, will continue to trend lower as healthy economic activity continues to boost tax receipts substantially more than estimates.
Uh...isn't the US GDP is currently mainly comprised of government spending? Thats not really a show of healthy economic activity. Although it is true that the tax receipts are up more than estimated.

#15. The mania for commodities will completely end.
Yeah Right!!! All those millions of people in India and China who can now afford to buy a car and a decent place to live will choose to buy plastic go-karts and tents instead of regular cars and houses that use steel & copper. Is he completely blind to the global industrialization thats taking place? Every year China adds to its electricity generating capacity by the same amount as the entire UK. This electricity comes from coal and is used to make more cars and power more houses. The dude's smoking crack now.

#16. Oil falls to $35 to $40 per barrel and eventually $20-$25.
#19. Gas prices will drop below $4/mcf.
#20. Gold will drop below $550 per ounce
This was written on the 1st of Feb when Oil was around $50/barrel. Its since gone up to nearly $60 and is probably on its way up. Corn has quadrupled to over $4/bushel making ethanol almost as expensive as gasoline now. Similarly Gold is also up to $665. I actually bought some GLD (the gold ETF) 2 days ago and I'm already up 7%. I predict its going to $800 in 2 years.

#17. Peace in the Middle East.
HAHAHA.

Some of the points are actually valid, but the ones I've mentioned are pretty stupid. Like I've said before, I've taken exactly opposite bets in my stock investing, so of course my views are out of line with the authors.

What do you think?

Commodity Play: Billion Dollar Companies Swallowing Each Other

I own a few shares in a company called Freeport-McMoRan Copper & Gold Inc. (FCX). Monday they announced a bid to buy copper producer Phelps Dodge Corp. (PD) for $25.9 Billion. [yeah thats Billion]. Interestingly enough, as part of the bid FCX will pay $500 million if it backs out while PD will pay $750 million if it bails.

As if that wasn't exciting enough, yesterday an analyst floated a rumor that BHP Billiton Ltd. (BHP) would shortly announce a bid for FCX!!! Apparently the market liked that idea because prices for FCX and BHP did well. I also own shares of BHP. BHP is involved with oil, gas, copper, silver, zinc, lead, uranium, and copper by-products, including gold, aluminum, coking coal, iron ore, manganese, diamonds and fertilizers.

If you're wondering why I own stock in BHP & FCX its because I think we're going to see high inflation in commodity prices and a devaluation of the dollar. [search this blog for "inflation"]. Also read this post on "Hot Commodities".

Here's a good post on what the PD acquisition means at The Strategic Investor.

On another note, my dozen shares of PetroChina (PTR) have been doing pretty well. They're up 10% in the month that I've owned them.