Thursday, October 23, 2008 4 comments ++[ CLICK TO COMMENT ]++

Jim Rogers Interview on CNBC Europe; Plus My Thoughts On Commodities

I haven't seen Jim Rogers being challenged by many people for his polemic attacks but here is a clip where he is called to task. Thanks to A Jim Rogers' Blog for the video mentions. Do check out that blog for a few other clips, or other info about Jim Rogers.


I think Jim Rogers is being very hypocritical when he says that financial institutions should be allowed to collapse, while saying that the problem in the 1930's was that money wasn't funnelled to the banks while bank runs were under way. A lot of people who take positions similar to Jim Rogers--Jim Grant is another--seem like the modern day Herbert Hoover or Andrew Mellon. I agree that the economy hasn't been cut in half (it isn't even down 10%) but the credit bust is fairly large. Some already claim that letting Lehman Brothers fail was a mistake and I'm not sure what would happen if AIG, Goldman Sachs, Morgan Stanley, Wachovia, potentially UBS, potentially Royal Bank of Scotland, and others, were allowed to fail.

(BTW, I'm not advocating giving out free money (recall that I was against the original Paulson plan to hand out free money by purposely overpaying for assets.) Rather, I'm talking about government injecting capital for ownership stake--an equitable strategy for both shareholders and taxpayers.)


I have been bearish for commodities for a few years now, and hence missed the big boom as well as the big bust. However, I was bullish on commodities a few years ago due to influence from, none other than, Jim Rogers and Marc Faber. In fact, more than 70% of my portfolio was oil&gas or gold stocks, but I sold too early and didn't really make much. I still think there is some merit to a bullish commodity call but I'm not sure if Jim Rogers is correct with his oil call. He says that oil has dropped 40% on several occasions in the last few years, only to bounce back up. But what if doesn't bounce back up? Oil is already up 500%+ from the bottom and chances of it going up another 500% (assuming US$ doesn't fall off a cliff) are slim. If you are entering oil right now, you better be sure that it is going to do well.


The commodity area that warrants a deeper look--this is the area that Rogers and Faber are most bullish on--is soft commodities (agriculturals.) Historically, agricultural commodities have been a total disaster (actually all commodities have, but agriculturals are the worst.) Agricultural commodities have been deflating for over a 100 years! I remember looking at an index of soft commodities and it is basically a downtrend for something like 50 to 100 years (if I look deeper into this sector I'll try to pull up some charts and write about it.) One of the reasons for the bear market in agriculturals is due to the revolution in farming, where crop yield has increased significantly due to fertilizers, machinery, and so forth. The bear market is so bad that very little farming would exist in America and Canada if it weren't for government subsidies (prices are actually artificially held up right now.)

But it may be different this time. Yes, I realize these are the 4 most dangerous words in investing :). The secular thesis--this is a super macro call--for agriculturals is the view that citizens in developing countries will be moving up the value chain and eating a richer diet. This seems far more likely than the conventional view that everyone in these countries is going to own a car soon*. I have been thinking lately of making investments (possibly in mid to late 2009) to profit off this macro thesis. If I do more research, I'll post my thoughts. Some examples of investment possibilities (not that I have access to all; it's just ideas): Russian farms; farmland in general; agricultural commodity ETF/ETN; agribusiness stocks (eg. Bunge, Archer Daniels Midland); fertilizer stocks; Canadian or American agricultural companies (eg. Viterra). One problem is that diets vary across the world so what is needed in China may not be grown in Canada.


(* Car usage will remain low in developing countries for several reasons. One is pollution. Many of these countries are heavily polluted without heavy automobile use. If everyone started driving cars, people are literally going to die of pollution. Another reason is that infrastructure is so bad in many countries that car ownership will not take off until roads, gas stations, mechanic workshops, etc are built. Otherwise, the traffic jams would just be unbearable.)

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4 Response to Jim Rogers Interview on CNBC Europe; Plus My Thoughts On Commodities

Anonymous
October 24, 2008 at 11:25 AM

Sivaram,

I like your blog very much and am grateful to you for giving Austrian School proponents -- Faber, Grant, Rogers, etc. -- a voice.

However -- and with all due respect -- i don't think you understand the Austrian interpretation of financial history.

For instance, you characterize Herbert Hoover as non-interventionist. From the Austrian point of view, Hoover was the most interventionist President in US history until, of course, FDR.

Since you seem to be interested in the Austrian School, if not a believer, I strongly urge you to read a book or two from an Austrian Economist that addresses specific financial events.

I have read Murray Rothbard's "A History of Money and Banking in the US." [or something like that]. It spans colonial times through World War II. It is, at times, dry and arcane, but if you can get through it, I think you'll get better understanding of the Austrian school than you do now.

Alternatively, you could read "America's Great Depression" [or something like that] -- again from Rothbard. I haven't read it, but I plan to.

I'm not saying that you'll become a convert; but I am saying that based on what I've read from you, you really don't understand where the Austrians are coming from.

Best,

Applesaucer

October 24, 2008 at 12:29 PM

Thanks for the suggestions Anonymous. I will admit that I do not claim to know Austrian Economics. But I am not an economist and I don't claim to know (apart from some economics courses or reading on my own) or support everything in alternate types of economics either.

I have only read articles and essays on Austrian Economics (no books) and I have essentially dismissed it because it is not science. You can read some of the critique of Austrian Economics from Wikipedia. I just cannot come around to following a system that rejects the scientific method.

From my limited understanding of Austrian Economics--any economics--just about the only thing that I feel Austrian Economics has any merit is the strong view for the existence of business cycles. Others, such as many Keynesian derivative systems, either assume there is no business cycle or assume that you can eliminate it.

Apart from that, I don't think Austrian Economics has much going for it. Part of the problem I feel is that you guys are, sorry to be rude but, 'living in the past'. It seems that every Austrian ends up blaming nearly all the problems of the world (not just today but even 20 years ago) on central banks (and fiat currencies, and so on). Yet, a lot of the current issues are similar to the 1700's and 1800's when we did not have central banks, currencies were backed by gold or silver (for the most part) and government regulations were non-existent for many things in life.

If I get a chance to gather my thoughts, I'll try to write up a critique of Austrian Economics. Or at least dismiss some of the explanations that are given.

Regardless of what I said above, rest assured that I respect some of the thinking of Austrian Economists. I respect Jim Grant, even if I don't agree with him, and might even buy his forthcoming book :) Like I said, you guys have nailed the business cycle better than most other economic theories that are floating around. However, your downfall is the over-reliance of pinning all the problems on fiat currencies and central banks. I'm not saying that's all there is to Austrian Economics but those are key elements that are hard for me to believe.

contrariandutch
October 25, 2008 at 9:45 AM

What the soft commodity bulls may be overlooking is that the same massive deflationary force that relentlessly pushed down soft commodity prices over the last 200 years (yes, that long!), technological improvement coupled with improved organisation, could very well continue to keep prices down. Over the last 200 years world population more then quintupled and diets got much richer, yet soft commodity prices have only fallen.

I see no reason why it would be different this time.

October 27, 2008 at 11:42 AM

ContrarianDutch,

I share similar concerns. I'm not too sure of the thinking with the agricultural bet. I think the commodity bet looks risky but commodity shares (businesses) may be ok. Even if the agriculaturl prices don't go anywhere, it's possible for businesses to do well. Recall how the semiconductor industries (say memory or CPUs) have continuously deflated over the last few decades but some businesses have done really well.

Although history has not been kind to agricultural commodities, the emergence of countries like China (assuming it doesn't fall apart) is almost unprecedented. Poor people that are becoming wealthier are likely to increase their food quality first.

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