Sunday, April 13, 2008 3 comments ++[ CLICK TO COMMENT ]++

Jim Rogers Barron's Interview via SeekingAlpha

Barrons conducted an interview with Jim Rogers, and since I don't have access to it, I'm going with a summary from SeekingAlpha. It doesn't seem like anything new. According to Eli Hoffman's summary, Jim Rogers is bullish on the Chinese renminbi, which you can go long through the CNY exchange-traded note, commodities like nickel, and Boeing (BA). He is short Citigroup, Fannie Mae, Brokers/Dealers, and homebuilders. Supposedly he has exited the emerging markets for the time being.

I was heavily influenced by Jim Rogers a few years ago (actually I was really influenced by Marc Faber, but both of them share similar views.) I never really utilized his suggestions to maximum effect but I probably woudln't have invested in gold and oil stocks if it weren't for that influence. Lately, however, I don't really share the same opinion as Jim Rogers (or Marc Faber). I just don't feel comfortable with commodities. I feel like they have run up too much and resemble a bubble. I have been bearish on commodities for over an year (that's why I'm short the TSX via the inverse fund) and been completely wrong.

As for China, I think it has the potential to be the next big economic power but it will go through some growing pains. There is far more risk in China than anyone--including Jim Rogers--admits. In particular, I feel like the political risk is not being priced properly. The government is run by a totalitarian government which can arbitrarily change its views. Remember one of the near-truisms in econopolitics: when economic times are good, politics is good; politics only starts to become an issue when the economy isn't so good. There have been more revolutions, collapses, wars, and government coups that occurred when the economy ran into problems than at any other time. A few examples include Serbia (Milosevic fell, not due to the war, but because of the economic problems), USSR (Yeltsin gained popularity after some economic problems), Indonesia (Shuarto fell when the economy fell apart, and not when he was committing mass abuses), and so on. I would even argue that the (likely) change in government in present day Zimbabwe, which has been ruled by a dictator for decades, is occurring because of economic problems. The citizens of Zimbabwe couldn't topple Mugabe in the prior 20 years even though he was just as bad back then (his racist policies have seriously hurt whites lately but from an economic or political point of view, he was a disaster 15+ years ago too). Sorry about the rant but the point is that you never know how stable the government is until you run into an economic problem.

I really feel that the market is not discounting the political risk in China. I feel Jim Rogers is also not discounting the risk. China is not that bad so I'm not saying it is equivalent to Zimbabwe or something. Nevertheless, the weak property rights, totalitarian government, and lack of history dealing with economic problems (China has been growing at a high rate for a long time) makes me nervous. I would get more comfortable with China after seeing how it handles an economic slowdown or recession.

I have high tolerance for business and industry risk (witness Ambac; or GM bonds a few years ago) but I am wary of political risk. I wouldn't mind investing in a turnaround situation where a country is struggling mightily. But I personally feel (this is just a newbie opinion) that political risk is pure gambling. For example, I really feel like an investment in Venezuela is closer to gambling than anything (it depends on sector but I'm thinking about natural resources.) When someone like Mohnish Pabri invests in Harvest Natural Resources (HNR), I feel like he is gambling that the government isn't going to nationalize the company. In contrast, it is a totally different matter if you were taking a similar high risk in Ambac by betting that the subprime mortgage defaults will stabilize or improve. Both are high risk and involve trying to figure out probabilities but the political risk is worse in my eyes because it can have "irrational" outcomes.

What I am about to say is probably controversial but I feel that the wealthy often do not value freedoms to the same degree as the lower class. I hate to paint with a broad brush so do not interpret what I am saying as some sort of an attempt to start a class war. For instance, I notice a lot of wealthy people hold Singapore and Dubai in high regard, even though you have literally no freedoms in those countries. I suppose all these people are putting money above freedom and expect to flee if there are any serious problems. In my opinion, it's a dangerous game these people play...

Tags: , ,

3 Response to Jim Rogers Barron's Interview via SeekingAlpha

Anonymous
April 14, 2008 at 3:42 AM

In a bubble you'd expect high inventories, high sector employment, high capital expenditures and high valuations. None of those are true in the commodity area. (not an original thought by me, courtesy of: http://www.financialsense.com/Market/daily/wednesday.htm)

If there's a bubble anywhere at this point, it's in treasuries, no?

April 14, 2008 at 4:49 AM

Great informative post ,

Thanks ,

Tracy Ho
wisdomgettingloaded

April 14, 2008 at 12:16 PM

Anonymous, here is my response to your argument...

TREASURIES

Treasuries are no doubt seemingly overvalued. But I'm in the disinflation/deflation camp and if inflation actually declines (or if we get bouts of deflationary forces), treasuries can stay low for a while. Nevertheless, I would not want to go anywhere near Treasuries.


COMMODITES

I wrote a response to a similar reference regarding commodity stocks (inventory) versus peaks. To sum up, commodity stocks (inventory) may peak during a bottom, rather than them peaking during a bubble top. I'm thinking it may be similar to housing, where housing inventory actually was very low during the top (2005/2006), whereas inventory is now increasing and will likely hit a peak during the ultimate bottom. Instead of typing up my views here, I'll try to write up a bear case for commodities and see what holes you can poke...

Anyway, like I said, I have been wrong with commodities so far...

Post a Comment