Interview with Jim Rogers, Part I: Bigger Financial Shocks Loom

by: Keith Fitz-Gerald August 19, 2008    

Keith Fitz-Gerald

From Money Morning:
China Oil Plays
Oil for 25 Cents
Jim Rogers
A Bull In China
Become a Contributor Submit an Article
  • Font Size:
  • Print

VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.

The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”

During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said that:

  • U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.
  • That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
  • That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn’t raise borrowing costs, market forces will make that happen.
  • And that the average American has no idea just how bad this financial crisis is going to get.

“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor’s 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the recently released "A Bull in China." And he made some historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that’s fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers’ candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:

Keith Fitz-Gerald [Q]: Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers:  There was a train wreck, yes.  Two or three – more than one, as you know. [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue. Which is going to cover things up for a while. And then I don’t know how long the rally will last and then we’ll be off to the races again. Whether the rally lasts six days or six weeks, I don’t know. I wish I did know that sort of thing, but I never do.

[Q]: What would Chairman Bernanke have to do to “get it right?” 

Rogers: Resign.

[Q]: Is there anything else that you think he could do that would be correct other than let these things fail?

Rogers: Well, at this stage, it doesn’t seem like he can do it.  He could raise interest rates – which he should do, anyway. Somebody should. The market’s going to do it whether he does it or not, eventually.

The problem is that he’s got all that garbage on his balance sheet now. He has $400 billion of questionable assets owing to the feds on his balance sheet. I mean, he could try to reverse that. He could raise interest rates. Yeah, that’s what he could do. That would help. It would cause a shock to the system, but if we don’t have the shock now, the shock’s going to be much worse later on. Every shock, so far, has been worse than the last shock. Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then it’s Fannie Mae, you know, and now Freddie Mac. 

The next shock’s going to be even bigger still. So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They’ve been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the “dot-com bubble” shock, so I guess Bernanke could try to start reversing some of this stuff. 

But he has to not just reverse it – he’d have to increase interest rates a lot to make up for it and that’s not going to solve the problem either, because the basic problems are that America’s got a horrible tax system, it’s got litigation right, left, and center, it’s got horrible education system, you know, and it’s got many, many, many [other] problems that are going to take a while to resolve. If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better. 

But this is academic – he’s not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign. That’ll be the best solution.  Is he going to do that? No, of course not. He still thinks he knows what he’s doing.

[Q]: Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn’t know anything’s wrong – that anything’s happening. Is that still the case?

Rogers: Yes.

[Q]: What would you tell the “Average Joe” in no-nonsense terms?

Rogers:  I would say that for the last 200 years, America’s elected politicians and scoundrels have built up $5 trillion in debt. In the last few weekends, some un-elected officials added another $5 trillion to America’s national debt.

Suddenly we’re on the hook for another $5 trillion. There have been attempts to explain this to the public, about what’s happening with the debt, and with the fact that America’s situation is deteriorating in the world. 

I don’t know why it doesn’t sink in. People have other things on their minds, or don’t want to be bothered. Too complicated, or whatever. 

I’m sure when the [British Empire] declined there were many people who rang the bell and said: “Guys, we’re making too many mistakes here in the U.K.” And nobody listened until it was too late. 

When Spain was in decline, when Rome was in decline, I’m sure there were people who noticed that things were going wrong.

[Q]:  Many experts don’t agree with – at the very least don’t understand – the Fed’s current strategies. How can our leaders think they’re making the right choices? What do you think?

Rogers: Bernanke is a very-narrow-gauged guy. He’s spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America. There’s no problem in housing finance. I mean this was like in 2006 or 2005.

[Q]: Right.

Rogers:  He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else. 

[Q]: That’s problematic. 

Rogers: It’s mind-boggling. Here’s a man who doesn’t understand the market, who doesn’t understand economics – basic economics. His intellectual career’s been spent on the narrow-gauge study of printing money. That’s all he knows. 

Yes, he’s got a PhD, which says economics on it, but economics can be one of 200 different narrow fields. And his is printing money, which he’s good at, we know. We’ve learned that he’s ready, willing and able to step in and bail out everybody. 

There’s this worry [whenever you have a major financial institution that looks ready to fail] that, “Oh my God, we’re going to go down, and if we go down, the whole system goes down.”

This is nothing new. Whole systems have been taken down before. We’ve had it happen plenty of times.

[Q]: History is littered with failed financial institutions.

Rogers: I know. It’s not as though this is the first time it’s ever happened. But since [Chairman Bernanke’s] whole career is about printing money and studying the Depression, he says: “Okay, got to print some more money. Got to save the day.” And, of course, that’s when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

[Q]: And now we’ve got a dangerous precedent. 

Rogers: That’s exactly right. And when the next guy calls him up, he’s going to bail him out, too.

[Q]: What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Rogers: Well, Volcker has said it’s certainly beyond the scope of central banking, as he understands central banking.

[Q]: That’s pretty darn clear.

Rogers: Volcker’s been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker. We’ve had couple in our history: Volcker and William McChesney Martin were two. 

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in.  McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party’s out of control. 

[Q]: This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?

Rogers: Yes. We had two central banks that disappeared for whatever reason.  This one’s going to disappear, too, I say.

[Q]: Throughout your career you’ve had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

Rogers: That’s the way to invest, as far as I’m concerned. 

[Q]: So conceivably, history would show that the highest returns go to those who invest when there’s blood in the streets, even if it’s their own. 

Rogers: Right.

[Q]: Is there a point in time or something you’re looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Rogers:  Well, yeah, but it’s a long way away.  In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts. Not all of them, but most of them last week. 

So, if you’re talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn’t let the Chinese buy the oil company, wouldn’t let the [Dubai firm] buy the ports, et cetera.

But I’m really talking about full-fledged, all-out exchange controls. That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they’re somewhere during the decline. Then the politicians bring in exchange controls and then things get worse from there before they bottom. 

Before World War II, Japan’s yen was two to the dollar. After they lost the war, the yen was 500 to the dollar. That’s a collapse. That was also a bottom.

These are not predictions for the U.S., but I’m just saying that things have to usually get pretty, pretty, pretty, pretty bad. 

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world. It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation.  And strict exchange controls. They in fact made it an act of treason for people to use anything except the pound sterling in settling debts. 

[Q]: Treason? Wow, I didn’t know that.

Rogers:  Yes…an act of treason. It used to be that people could use anything they wanted as money. Gold or other metals. Banks would issue their own currencies.  Anything. You could even use other people’s currencies. 

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by ’39 they had full-exchange controls.  And then, of course, they had the war and that disaster. It was a disaster before the war.  The war just exacerbated the problems. And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds. Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world. 

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing. And the U.K. suddenly had a huge balance-of-payment surplus. 

You know, even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would’ve been great. 

You give me the largest oil field in the world and I’ll show you a good time, too.  That’s what happened.

[Q]: What if Thatcher had never come to power?

Rogers: Who knows, because the U.K. was in such disastrous straits when she came in. And that’s why she came to power…because it was such a disaster.  I’m sure she would’ve made things better, but short of all that oil, the situation would’ve continued to decline. 

So it may not be in our lifetimes that we’ll see the bottom, just given the U.K.’s history, for instance.

[Q]:  That’s going to be terrifying for individual investors to think about.

Rogers: Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don’t just change that in a decade or two. It takes a lot of hard work by a lot of incompetent people to change the situation. The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time. 

Even Zimbabwe, you know, took 10 or 15 years to really get going into it’s collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it’s a major disaster. 

That’s one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people. So even if it started squandering it in 2008, which they may be, it’s going to take them forever to do so.

[Q]: Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

[Q]: They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentinians and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

[Q]: We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers: Everybody figures it out, eventually, including the politicians. They say: “You know, others can’t do this, but it’s alright for us.” Those days will come. I guess when all the congressmen have foreign bank accounts, we’ll be at the bottom. 

But we’ve got a long way to go, yet.

[READ PART 2]

Original post

Related Articles

This article has 36 comments:

  •  
    Aug 19 12:21 PM
    Exchange control mechanisms have just started in the U.S. Bush recently signed a bill making it very hard to move overseas and take your money with you. All IRA's and 401K's become fully taxable. Now ask yourself why would something like this be necessary if we believe in so-called "free markets'?
    Reply | Link to Comment
  •  
    Aug 19 12:57 PM
    Jim always hits the nail on the head. Hei s so right about this country, just look at what is happening and how hard people are working to make ends meet. The rich are getting richer because they have education, the ability to invest in hedge funds and other risky investments with great returns which in term takes massive risks are are bailed out by parent company or uncle Sam. With the amount of natural wealth and resources America has, majority of it's naturalized citizens should be very well off and not have to worry about money, education, health care and retirement. The problem is the the government taxes us to death, spends money like a teenager with a open line of credit at a mall and inflation is much higher than income growth across the board during the past 30 years. Credit and litigative society will destroy the country in due time.
    Reply | Link to Comment
  •  
    Aug 19 12:58 PM
    Also,the IRS is tightening down on Swiss accounts,for tax purposes,they say...but that will also give the transparency the government needs.Just a thought..
    Reply | Link to Comment
  •  
    Aug 19 01:06 PM
    An entertaining read. Thanks!
    Reply | Link to Comment
  •  
    Aug 19 01:17 PM
    These comments are all very good and well but the strategies that Rogers would implement to clean the slate, would, in all likelihood, probably cause not just a recession but a full blown depression in the US with banks collapsing left right and centre, deflation and atleast a doubling of unemployment rates. It would likely also cause debt to GDP to surge because of the shrinkage of the denominator. I agree that thing need to change in the US - better regulation and higher taxes would be a good start - but plunging headlong into the abyss is unlikely for valid political and economic reasons.
    Reply | Link to Comment
  •  
    Aug 19 01:37 PM
    It is true that the strategies that Jim Rogers suggests would surely bring on a depression. On the other hand, if we continue on the path we are now on, the strategies will not be chosen, but, rather, will be imposed upon us. That will lead to another Great Depression, not just a depression. So, we'd be wise to opt for the mild depression, now. However, we won't. What I'd like to know is what country to move my money to? The Swiss are not exactly wise money managers, from what I can see. After all UBS is second only to Citigroup in all the bad paper it issued, and kept.
    Reply | Link to Comment
  •  
    Aug 19 03:37 PM
    1) Interesting how the British escaped insolvency, energy.
    2) With the credit bubble popped, Middle Class getting squeezed hard. Historically, I believe we will see voter revolt in 2012 which also happened in 1934 .
    3) Emporer Hirohito can be thanked for ending the Great Depression as the US cranked up it's manufacturing and war machine to 75% of GDP. And why couldn't this be done for energy independence? It can but see another 4 years of corruption and consumer pain before corrupt voted out of office.
    4) The jobs data is messaged, believe it already 10%. Jobs are eroding, offshoring. No US savings. Plunging home prices. Very similar circumstances of cause and effect of the Great Depression. 'Bleed out over decades' theory doesn't seem to fit, but Rogers is respected so I will simply say I agree to disagree.
    5) Geopolitics real big wild-card. 1908 global financial crisis - WWI in 1914. In 1929 global financial crisis, WWII in 1939. In the age of nuclear proliferation, a Super Crash would not be surprise overnight based on any nasty events. I hope for the best, prepare for the worst.
    6) Believe 2001 was first year of downward trend in US. 12 year cycles of larger bulls begin to emerge, let's just see what Washington does before I plunk all my money down in 2013.
    Reply | Link to Comment
  •  
    Aug 19 04:45 PM
    I think it's interesting that Rogers mentioned North Sea oil as UK's temporary savior.

    But how much excess natural resources do the US and Canada have combined? And what about China, his preferred country of choice?

    Our country is very smart in burning away most of the Arab crude oil for less than $30/bbl.
    Reply | Link to Comment
  •  
    Aug 19 05:57 PM
    But how do you prepare for the worst? With all the dire predictions, I don't hear much from the experts about what an average investor like me can me can do to deal with the incoming crisis? Hoard gold, cash, foreign currency, dollars, prayer...?
    Reply | Link to Comment
  •  
    Aug 19 07:00 PM
    jim has always been a bear/cautious investor. its just how he is.
    Reply | Link to Comment
  •  
    Aug 19 09:37 PM
    Great point about the North Sea oil. Sad that we have vast oil reserves in our country and our genius politicians prefer to screw over the very citizens that voted them into office by not using them all while taking paid vacations and flying all over the place and never paying for fuel. What a bunch of douche bags we have in charge of our country. I spent 7 years in the military and I do love America, but I doubt I'll be living here in 15 years, it's driving me nuts to see morons like Pelosi ruin it for us all in the name of saving the planet.
    Reply | Link to Comment
  •  
    Aug 19 09:57 PM
    Wait, so, should I buy shares in the AOL spinoff or not? I wish Jim would stop being so coy and just say what he means.
    Reply | Link to Comment
  •  
    Aug 19 10:08 PM
    Jim Rogers is the next Angelo Mozilo. China bubble is bursting, and Chinese economy is on the verge of collapsing , so will commodity bubble
    Reply | Link to Comment
  •  
    Aug 19 10:16 PM
    Philman: "What country to move my money to?"
    tlc: "Hoard gold, cash, foreign currency?"

    The one best thing to do is maximize your income from employment or trade, and develop a strong social network. Don't isolate. Teach your kids to read, write, add, subtract, solve practical problems instead of watching TV or playing gruesome first-person shooter games. Plant a garden to instill the idea of deferred gratification. I don't think it matters which currency or asset class you hold. What matters most in the long run is to cut the size of government, cut public spending, reduce taxes, regulations, and entitlements.
    Reply | Link to Comment
  •  
    Aug 20 01:31 AM
    mkreisel,
    how much excess oil supplies???
    at present consumption levels, the proven reserves qre equal to 6.5 years of consumption.

    russian style fix is on the way: few selected will be advised to move their money offshore, the currency will be debased, then the money will be brought in to purchase at discount all tangiable assets. say welcome to the oligarch (aka feudal) system again!
    Reply | Link to Comment
  •  
    Aug 20 02:58 AM
    The US has far more oil reserves than Saudi Arabia, just to put it conservatively.

    Of course, the government doesn't let you get them under the disguise of "environment protection".

    But when you see a democratic White House and Congress suddenly allow drilling there, it means that peak oil point is imminent, and the world is about to tap into its final strategic petroleum reserve.

    In addition to oil, the US controls another even more vital resource: grains. You don't have drive a car, but you certainly have to EAT!
    Reply | Link to Comment
  •  
    Aug 20 08:33 AM
    Another thing to add is that it would be nice if Washington would take the heed of Senator Tom Colburn of Oklahoma, also known as Dr NO. He blocks every bill in the Senate related to spending and will only vote for it if something else in the budget is reduced to cover that expendure. Of course no one listens to him.....

    If we had that kind of courage we would have more to spend without excessive spending and taxes coming from Washington. That would help shut down a couple of printing presses in the US Treasury Jim Rogers is talking about.
    Reply | Link to Comment
  •  
    Aug 20 11:20 AM
    An excellent published interview with Jim Rogers.

    Every time Jim Rogers is quoted or interviewed in the media, a quip of his comes to mind from years ago -- back in the days when Mr. Rogers would appear on "CNBC." It went along the lines of,

    "If that's where the smart money is, I'd rather be dumb."



    Reply | Link to Comment
  •  
    Aug 20 12:11 PM
    Jim Rogers spoke about investing in China today.

    You can see his comments in investinchinastocks.bl...
    Reply | Link to Comment
  •  
    Aug 20 12:46 PM
    Jim Rogers is a perpetual bear and pessimist. He knows how to make money, of course, and is sometimes right. I wish I followed his advice and purchased commodity futures. But he knows little about history and says stupid and uninformed things. For example, before the Federal Reserve was established in 1914, there was only one other central bank in American history, the Bank of the United States, that was abolished when Andrew Jackson vetoed its extension in the 1830s. Rogers says there were three. Also, Bernanke has as much authority of abolish the Fed as I do. It was established by Congress in 1914, after a long period without any central bank. Rogers also says that Great Britain had the dominant economy in 1914. Again, he is wrong. The United States outproduced England at the time, and the British economies long-term slide accelerated as a result of World War I, well before the 1930s, contrary to what Rogers says. Moreover, he makes the ludicrous claim that British banks in the 1930s issued their own currency. Total and complete nonsense. I could go on and on dissecting Rogers' absurdities but will desist. In short he knows how to make money but take whatever else he says with a grain of salt. And as for letting everything fail instead of trying prop up the system, that's precisely the advice Sec. of the Treasury Andrew Mellon offered Hoover in 1930. "Liquidate, liquidate, liquidate," he said, meaning do nothing and let bankruptcies cleanse the system. Well, we all know where that led: 25 percent unemployment and the worst depression in American history, a depression that almost destroyed the capitalist system. Rogers is Mellon redux. Any politician or reader accepting his advice would be accepting the advice of a fool.
    Reply | Link to Comment
  •  
    Aug 20 01:35 PM
    Emerald wrote that Bush signed a law that makes it difficult to take your money overseas. Does anyone know what bill / law is this?

    Thanks
    Reply | Link to Comment
  •  
    Aug 20 02:16 PM
    I have read a couple of Rogers books, and he comes across much better in that vehicle than in interviews. I did follow some of his advice on the commodity side (gold, oil, corn) and made some money despite being skeptical of a "20 year commodity boom" as he called it. Outside of specific commodity calls, most of Rogers advice is of little value IMO. He is always bearish and gets too many facts wrong, perhaps on purpose for his own objectives.

    Credit issuance is risk related, and if everyone is risk averse because they lack confidence in economic fundamentals, then its a spiral for a while. The current cycle may last several years, but "not in our lifetime" is just an attempt at headline grabbing.

    I think the commodity costs have forced a shift in demand and trade that has yet to be played out, with more regional trade and manufacturing due to oil costs. If inflation is tempered back to a 2-2.5 annual pct range, then I think the spiral will "bottom".
    Reply | Link to Comment
  •  
    Aug 20 02:19 PM
    The biggest challenge we face is that this bubble happen to burst at the election season, and politics colors every opinion expressed here. I agree that Rogers historical escapades are either not accurate or outright intentionally misleading and wonder if it is motivated by his political beliefs given his long and close association with Soros who would go to any extend to prop his agenda.
    As for Rogers critic of Bernanke, it is hard for me to believe that he would not know that the Chairman has no power to make decisions without consensus of the Board, which makes him sound more like a blowhard than a guru.
    Reply | Link to Comment
  •  
    Aug 20 06:56 PM
    I wonder how much Jim lost, investing in China entities, since he left the US. China's market is down more than the US.
    Reply | Link to Comment
  •  
    Aug 20 08:08 PM
    Call him what you will, the smart ones listen to what he has to say. He's as important a figure in the investing world precisely because of his track record...nobody listens to losers. And Jim Rogers is no loser...
    Reply | Link to Comment
  •  
    Aug 20 09:00 PM
    @recourse bob - you're of course correct about China the past 52 weeks. But if you've been invested since 2003-4, you're still up a ton. It all depends on what your timeframe is.

    More importantly, what's going to happen over the next 5 years.
    Reply | Link to Comment