Monday, September 19, 2016

Jim Rogers on Oil, Gold and Why China Is a Buy

Legendary investor Jim Rogers couldn’t be blamed for always carrying a piece of gold in his pocket given the uncertainty that stalks global markets.

Rogers remains a true believer in the precious metal given his unease with what he sees in global markets. Frankly, he’s worried. He’s not a believer in Wall Street’s rally and is shorting U.S. stocks, though paradoxically for a gold fan he likes the U.S. dollar. And don’t get him started on the U.S. presidential race – he’s not a big fan of either Trump or Clinton.

Barron’s Asia recently caught up with the 73-year-old investing veteran in his adopted home of Singapore. Famed for cofounding Quantum Fund with George Soros in 1973, he’s an avid observer of China, a country whose potential inspired the Alabama native to move his family to Singapore so his two daughters could learn Mandarin. While acknowledging the challenges confronting Beijing, he still believes the 21st Century is China’s century. Reflecting the spirit of his book Adventure Capitalist, Rogers also generously offered an eclectic mix of investment ideas from around the world, with picks spanning lithium and graphene stocks, Russian ruble-denominated debt, Chinese tourism plays and a Colombian marijuana company.

Barron’s Asia: So what’s your big picture view of global markets?

Jim Rogers: People tend to think stock markets are fine because the U.S. averages are okay but the S&P500 is up only because of a few stocks- twice as many stocks on the NYSE are down as those that are up. Amazon ( AMZN ) continues to soar but most things in the world are down. It makes me worried. What seems to be happening now is the U.S. is the only place where you can earn interest or dividends so more and more money is flowing into the U.S. and crowding into a few stocks.

I own a lot U.S. dollars and I’m short U.S. stocks. The dollar continues to be strong and it looks like it’s going to go higher and higher. It’s good for me because I own dollars but it’s causing more distortions in the world. People flee into the dollar to earn returns and to seek a safe haven. It has been a safe haven historically but won’t be in the future because it’s going to get overpriced and might even turn into a bubble depending on how chaotic things get in the rest of the world. Also, the U.S. is the largest debtor nation in history. But given few choices at the moment, people buy into dollars. If it turns into a bubble, I hope I’m smart enough to sell my dollars at that point.

Q: What could shake confidence in the U.S. dollar? Could a victory by Trump in November sap the greenback’s strength?

A: Well, if Donald Trump blows up Mexico or goes to war with China then it would scare people. But even then people are going to think America is going to blow up the world so they would buy more dollars. If Trump wins and he does what he says he’s going to do such as wage trade wars then it’s going to be bad news for all of us. Trade wars have led to bankruptcy and bankruptcy has often led to war. At that point, you’d better own a lot of gold.

Q: So you’re no fan of Trump. How do you rate Hillary Clinton?

A: With all due respect, Hillary Clinton doesn’t have a clue. The only difference between Clinton and Trump is it’s going to take Clinton longer to force us all into bankruptcy. What happened in the Middle East under Hillary Clinton was a total disaster for America and what will happen under Hillary Clinton as president will be even more of a disaster. Perhaps the only worse disaster for America is Donald Trump. It’s one of the few times in history where both candidates running for the presidency of a major country are disliked by everybody. I’m not going to vote for either of them.

Q: How concerned are you about the dislocations in the global economy and the evolution of more sharply divided and populist politics?

A: There are a lot of similarities to the late 20s, where there were strange politicians saying strange things and coming to power with strange ideas. At the same time, you have financial dislocations left over from previous financial dislocations. In the late 20s, a lot of money flowed into the U.S. because that’s where you could earn interest. The Federal Reserve raised rates and America drew more money and it led to a huge stock market bubble that collapsed and you may know the rest of the story: we had a depression and we had war. And I see some of the same kinds of personalities and some of the same financial dislocations. In 1927, the U.S. economy peaked but stocks kept going higher while the rest of the world was coming down because of these artificial flows of money. I don’t want to paint too sharp a picture here but the same thing may be happening, and if it is, think about buying a farm in New Zealand or Australia.

Q: Gold is up 30% since the beginning of the year. You’ve been a long time bull but are you still buying?

A: I own gold but I haven’t been buying. The commitment of traders shows that gold speculators own more gold than they ever have in history. I don’t want to be buying gold because this has always been a contrarian indicator. But if gold goes back down, I hope I’m smart enough to buy a lot more gold. Before this is over, gold is going to go through the roof and could turn into its own bubble – more and more people will lose confidence in governments and currencies and when that happens, they always turn to gold. I’d like for my children to have my gold someday but if a bubble takes shape – everybody owns gold and is regularly buying more – then I’ll have to sell and put my money into something else.

Q: What other commodities are you bullish on?

A: I’m optimistic about agriculture. Sugar, rice – just list the agricultural commodities that are down and I’m interested. I have some exotic metals but as far as the commodities themselves go, they aren’t liquid. I own a little uranium stock. I’m also a director atCrusader Resources ( CAS.AU ). It’s an Australian mining company that’s recently found lithium so it’s now a triple play on iron ore, gold and lithium. I have a lot of options in Crusader. Electric vehicles will need my lithium. I’m also invested in graphene throughMason Graphite ( LLG.CA ) in Canada. Graphene was discovered about 10 years ago and it’s incredibly light but stronger than steel.

Q: You started looking at Russia three years ago after having been pessimistic about the unloved market for almost five decades. What have you been buying?

A: I own Aeroflot (AFLT.RU) and Moscow Exchange (MOEX.RU). I also ownPhosAgro (PHOR.RU), which is a very large fertilizer company – I’m optimistic about agriculture and I’m optimistic about Russia so it was the perfect combination. All three have been making all-time highs – a shocking statement even to someone who owns the stocks – but I plan to hold onto them because I bought them for almost nothing and Russia can only get better. Unfortunately, Russia and China are being pushed together, which is great for them but not good for America and Europe.

I also own Russian government bonds in rubles and I plan to buy more when they go down again. They have very high yields and are a double play on the ruble and Russian interest rates. The ruble will go down with oil but when oil makes its bottom, the ruble will go higher. Oil is having its dead cat bounce and it will go back to test the lows – that’s usually what happens. My view is the lows will hold – maybe $24 a barrel, maybe $32 a barrel – and at that point, the ruble will make its bottom and Russian interest rates will undoubtedly be making their tops. Russian government bonds in rubles may be one of the best buys right now.

Q: So where is the next Russia?

A: Kazakhstan. It’s also a former Soviet country that’s affected by oil. It’s realized that it can’t play by the old rules anymore. Foreign investors are now subject to English law so it’s a place where good things are happening. Nigeria is the same thing - another oil depressed country. I opened an account in Nigeria last year but haven’t bought anything yet. Colombia’s had a horrible civil war for a long time but there’s now a ceasefire. Marijuana is becoming legal in more countries around the world, for medicinal purposes and also recreationally, so I’ve invested in a marijuana company in Colombia. Colombia has the perfect climate, soil and rain for growing the plant. If the medicinal studies about marijuana are right then it’s going to change everything.

Q: You’ve said China will be the most important nation of the 21st Century. What’s your view on China’s slowdown and its ability to handle challenges like overcapacity?

A: I own Chinese shares and my children speak Mandarin – they’re not going to stop speaking Mandarin if China starts having economic problems. There will be problems in parts of the Chinese economy. The manufacturing sector isn’t going to be in such great shape, especially exporters and companies with lots of debt. But there are also industries that will do well no matter what happens in the wider economy. China is spending so much money to clean up pollution that environmental protection will continue to do very well. Health care is another because China needs more health care and it needs better health care. China has also invested a lot of money into One Belt, One Road and may have the best railway technology in the world. Then there’s agriculture. Beijing is doing a lot of things to help farmers in the country side and has directed banks to give loans to the agricultural sector but to cut back on loans for property in cities. I own stocks in all of these areas. Sure, parts of the Chinese economy will go bankrupt and it will shock and scare the socks off people. The headlines will be that China’s collapsing, but underneath, there will be companies that will do very well. A key to successful investing is to own recession resistant stocks that do well in a bear market – that’s how you make a lot of money coming out the other side.

China’s going to have problems, which doesn’t really surprise me, but my kids aren’t going to start learning Danish when we see problems in China because China is going to come out the other side as the most important country of the 21st century. America, which became the most successful country in the 20th century, has lived through depressions and a horrible civil war. Every individual, company or country that rises has problems along the way – that’s how the world works.

Q: You’re also upbeat about the Chinese travel industry. Why?

A: One of the great growth industries of our time is going to be Chinese tourism because the Chinese have not been able to travel for decades, but now it’s easy to get a passport and it’s easy to take out money to put towards your travel. There are 1.4 billion Chinese who want to see their country and the world. I remember living in New York in the 80s and we all said “where did all these Japanese come from?” There are 10 times as many Chinese as there are Japanese. So I own Chinese airline stocks. I own most of them except the budget airlines.

Q: How would a weaker renminbi affect Chinese tourism?

A: The renminbi will continue to fall. Not for any special reasons but simply because the U.S. dollar is going up. The dollar is so strong that everything else will look bad compared to it. Plus, the renminbi has been the strongest currency since 2005 – it went up every year until 2014. Anything that goes up for such a long time usually has a correction. But remember, if the renminbi goes down, China becomes more attractive for foreign visitors and the Chinese who can no longer afford to fly to Paris will go to Xi’an or Xiamen instead.

- Source, Barrons