Interview With the Investment Biker

The revaluation of China’s currency that took the currency off the dollar standard has been all over the news. Investment U figured that there’s nobody better to ask about this than investment legend Jim Rogers…

Jim Rogers, if you didn’t know, returned investors about 40 times their money in a decade, and then retired. Even more amazing, it was the decade of the 1970s, when stocks did absolutely nothing.

I first met Jim at a private black-tie dinner in New Orleans in the mid-1990s. We sat next to each other for the night, and traded investment stories, though mine couldn’t compete with his… As the author of the bestsellers Investment Biker and Adventure Capitalist, Jim Rogers has no doubt logged more miles searching for investment opportunities than anyone alive.

We caught up with Jim by phone from Shanghai earlier this month, where he was apartment shopping. Jim latest book, Hot Commodities, is also "hot" these days, and Investment U’s own Jay Livingston quizzed Jim on commodities, the revaluation of the Chinese currency, and much more. With the news out of China today, let’s cover Jim’s thoughts on China as the first part of this interview…

Investment U: Let’s talk about China. You’re in Shanghai right now. Are you thinking about moving from New York?

Jim Rogers: Well, that’s one reason we’re here, because we’re contemplating moving to a Chinese-speaking city, and Shanghai is at the top of the list – at the moment, anyway. Our child is bilingual. We have a 25-month-old baby girl, and she’s bilingual. We got her a Chinese nanny from the beginning, whose instructions were to only speak Mandarin to the baby.

So she is literally bilingual, at age 25 months, and we’re doing everything we can to encourage and develop that. It doesn’t do any good to be bilingual at 25 months if you don’t keep it up; you’ll forget everything you ever knew by the time you’re 25 years old, or even 12 years old.

There are a lot of exciting things going on in China, and in Chinese-speaking areas. And even if I’m wrong about the baby – teaching her Chinese – even if China’s not going to be the next great country in the world, there’s still a billion and a half people in the world who use Chinese, so it’s not a complete waste. It’s not like I’m teaching her Danish or something.

There are 7 million who speak Danish, and there are a billion and a half who speak Chinese.

The Investment Biker on China: The Floating Yuan

Investment U: You talk in your book about the importance of the Chinese currency, the yuan (or renminbi) being allowed to float against other currencies instead of being pegged to the U.S. dollar, as it is now.

Jim Rogers: The Chinese are moving more and more towards making it more convertible. They’re letting Chinese institutions invest abroad now. Chinese tourists can get passports easily now… And they can take, I think, up to $6,000 if they go on a trip. So you’re starting to see huge amounts of Chinese travel.

So China is taking very small steps toward making this a completely convertible currency. It will happen by 2007, under the terms of the World Trade contract they have – you know, they joined the World Trade Organization. And they’ve got the Olympics in 2008. So certainly by 2008, China is not going to be sitting around here with a blocked currency anymore.

The consequences? Who knows? I’m sure there are going to be unexpected consequences. There always are, when an event is greatly anticipated.

Investment U: Would you speculate on the possible rise of the yuan at this point? Some expect it will shoot up once it’s freed from the U.S. dollar peg.

Jim Rogers: I know that hundreds of billions of dollars are being poured into China to take advantage of the rise in the renminbi. First of all, whenever something like that happens, it wouldn’t surprise me if this renminbi didn’t go down for awhile, because all those people who poured hundreds of billions into China to speculate have got to get it out.

But whether it goes up or down in the beginning, I don’t care. I’m going to be buying more of it myself. Because longer term, the renminbi’s going to be a big currency, a great currency.

The consequences, again, there have been hundreds of billions of dollars of speculation on the renminbi, and that always worries me. So I know there are going to be some surprises. I just wish I were smart enough to know exactly what the consequences will be and what the timing will be.

I’m not one of the people pouring money into China right now to speculate on the renmimbi, that’s for sure.

The Investment Biker on China: Hard Landing

Investment U: Is a hard landing in China inevitable at some point, as you suggest in your book?

Jim Rogers: Yeah, I don’t remember if I specifically said… But real estate is where the major speculation has been, and that’s where I’d expect the hard landing to center, if you will. It will reverberate out from there, of course. There will be other people who will suffer. That’s my view.

I mean, some parts of the Chinese economy will never even know that there’s a hard landing in Shanghai real estate, say, or that a bunch of real estate speculators in Beijing went broke. The guys out there producing coal, or building power plants, won’t even know that there’s a hard landing in other parts of the Chinese economy.

So I suspect it will certainly start with real estate, or something, and reverberate out… But parts of the economy will never know it.

Investment U: Should there be a hard landing in China, do you anticipate a major consolidation in commodities?

Jim Rogers: Yes, I do. Something’s going to cause consolidations in commodities. We always have consolidations in every bull market in history, no matter what the asset class. In every stock bull market, there have been consolidations along the way.

Again, I wish I were smart enough to tell you exactly what’s going to cause them, and the timing, but I’m not. It’s pretty obvious to me that if we suddenly see headlines in the Wall Street Journal of some kind of turmoil in China, that commodities would be having a correction, or would go into a correction. But that would be a chance to BUY commodities.

You know, in the ’80s and ’90s, we had some huge corrections in stocks. In ’87, stocks went down what, 35-40% in several months, but people who understood that this was in the context of a major bull market bought more stocks; they didn’t panic and sell.

Likewise, in ’94 or any of the other corrections along the way in the bull market in stocks in the 1980s and ’90s, you made a lot of money. So if you see those headlines, I urge you to buy all the commodities you can. Probably buy all the China you can, too; but certainly, buy all the commodities you can, too.

Investment U: So if China slows down or crashes, that would be a tremendous buying opportunity in China and commodities?

Jim Rogers: In terms of commodities, yes… especially in terms of commodities, but also in terms of China.

But again, I wish I were smart enough… If we suddenly have a bird-flu epidemic throughout Europe, I suspect economies around the world will decline and scare people and commodities will slow down for a while. If Fannie Mae goes bankrupt, it’s going to scare people. If China goes to war with Taiwan, it’s going to scare people.

Something’s going to cause consolidations, but buy ’em, don’t sell ’em.

Thanks to Jim Rogers for sharing with us his thoughts on China, especially in light of the breaking news on China’s currency revaluation. Next week, we’ll share more of Jim’s thoughts with you… specifically, on where he sees the greatest opportunities in the coming years. Don’t miss it.

Good investing,

Steve Sjuggerud & the Investment U Team

August 03, 2005

Dr. Steve Sjuggerud has worked in the investment world as a stockbroker, the vice president of a $50 million global mutual fund, an international hedge fund manager, and the director of several research departments.

We are trying to think different thoughts…and give ourselves severe handicaps.

It is another beautiful day here in the South of France. The sky is clear. The air is cool and dry. It is perfect weather for this fin de bubble summer.

But as we try to think new thoughts, old ones come back to us.

"Consumers and economists alike are looking over their shoulders at a growing American mountain of debt," says U.S. News.com. "Just how worried should most families be about what they owe? At the very least, economists fear that the indebtedness of the all-important consumer threatens U.S. economic growth, already slowed by record-high oil prices."

Yesterday, oil hit a new record – almost $62 a barrel. Reports from the homeland tell us that Americans still drive to malls…still spend…still shop and still borrow.

Spending rose in June by 0.8%. Incomes rose 0.5%. Americans are still spending more than they make.

"Household finances, like the economy, tend to run in cycles," U.S. News continues.

Usually, when times are good, families assume things will be good forever, so they spend more and save less. When times get tough – as they did in the mid-’70s, early ’80s, and early ’90s – consumers tighten their belts, saving more and borrowing less. But in the most recent downturn, starting with the bear market of 2000 and the recession of 2001, belts didn’t get tightened. In fact, they were loosened.

"Household debt rose from 96 percent of personal disposable income (consumers’ take-home, spendable cash) in 2000 to 111 percent in 2003 to 113 percent at the end of 2004. Just the fact that it’s growing isn’t necessarily a problem," says Scott Fullwiler, an economics professor at Wartburg College in Waverly, Iowa. "My concern is that as a percentage of disposable income, it’s at an all-time high."

"At the same time, the savings rate – that’s savings (not including home equity or investment gains) as a percentage of disposable income – has plummeted. It fell to 0.6 percent in May, down from as high as 3.4 percent in 2001 and 7.9 percent in the early 1990s."

These are old thoughts to us. They keep coming back to us…they are like a dead animal under the floorboards; it stinks until it is properly disposed of. We won’t be rid of these thought until consumer spending falls and savings rise. And those things won’t happen without a real recession. We’ll be glad when it comes – we’re getting tired of the stench.

We don’t know what to make of our new thoughts. We are trying them on like new shoes -looking for a pair that doesn’t pinch. Whether they are useful, or merely elegant, we don’t know yet.

At the heel of our new thoughts is the idea that thinking itself is little better than a conceit. We believe what we need to believe when we need to believe it. When circumstances change, we believe something completely different – even though we considered both thoughts eternal.

A man marries one woman. "She is the girl of my dreams," he thinks to himself. "I am hers forever." Years later, he finds a new girl of his dreams. People with no money of their own believe in the graduated income tax. "From each according to his means," they say. People with more money believe in "flat rate." It is fairer, they say. People with a great deal of money barely care what the tax rate is; money has reached a point of such low marginal utility they become indifferent. Besides, money really is a burden; the rich man has to take up expensive hobbies from which a poor man is spared. These handicaps help him get rid of his old money, as well as reducing his ability to compete for new money.

Warren Buffett, for example, encourages the government to take away his money when he dies. He favors the inheritance tax because money, to him, is a game. When people start with vastly different grubstakes, he says, it takes the fun out of it. Had he not been the best player in all history, he might not find the game so enjoyable. Had he not so much money, he might be more careful about where it goes. Had he not been who he is, where he is, and lucky as he has been, he might believe entirely different things. As it is, he enjoys the sport of making money…and looks for the government to impose a handicap…taking it away from him when he dies.

The idea of "handicap" comes from sports – where the stronger player spots the weaker competitor a few points in order to make the outcome less certain. But you see the phenomenon in nature too – where male animals give themselves handicaps in order to prove that they are stronger than their comrades (and therefore better candidates for mating). That is why male birds have such bright and elaborate tail feathers…and why stags have such huge antlers.

Humans give themselves similar handicaps. When a successful lawyer buys a beach pad…and a sports car…he is signaling that he is strong enough to carry the load without going bankrupt. And when a member of the British upper classes stutters, he is spotting his interlocutor a few points. "Look," the stammering tells us, "I know you are inferior, so I will act as though I can’t speak right just to try to level the playing field."

The handicaps are taken on for reasons of vanity. But they have the effect of bringing things into balance…that is; of helping them regress to the mean. If the stag really is strong, the rack of horns on his head will slow him down. After paying for his beach pad and sports car, the lawyer has barely any more free cash than his less-successful brethren. And after a few passes through the inheritance tax system great fortunes are reduced to modest ones.

We all believe what we need to believe…to get back to the mean.

More news, from our team at The Rude Awakening:

————–

Tom Dyson, reporting from Colorado…

"I’m in the hills above Boulder, Colorado to learn about gold mining. My hosts: Consolidated Global Minerals, a junior exploration and development company with other properties in Tunisia, Canada and Nevada. They took me up to the project yesterday morning to meet the crew and tour the mine. Here’s what I learned…"

————–

Bill Bonner, with more views:

*** House price increases have been running at three to six times the rate of GDP increases. It can’t continue – for obvious reasons; houses would soon become unaffordable (in many areas, they already are.) The big question is how the bubble ends…with a bang, or a whimper?

*** "In the struggle between man and beast," said your editor, limping towards the dinner table last night, "the beast has won a round."

Your editor has been giving himself a severe handicap. No man over the age of 50 should be allowed to take up horse riding. But at the urging of his wife – who bought him a very big horse – he decided to mount up. The first few sessions passed reasonably well. He began to imagine himself as the Lone Ranger atop Silver or perhaps Tom Mix with his horse Tony. But then, two days ago, he wrenched his back in the saddle, which must have come as a blessing to Daily Reckoning readers, since it made it difficult for him to sit up to write. And yesterday, the bloody horse tried to unseat him as he mounted – walking under a low-hanging limb as he was trying to get his stirrups on. Nor was that the end of it. After refusing several invitations to trot down the garden road, we road over to a riding ring for further instruction. This, too, began deceptively well. We practiced starting and stopping. Trotting and cantering. But as we approached the end of the session, the horse – Ipso – began running around the rink at a faster-than-usual pace.

Caught off balance, the cavalryman lost his right stirrup. No problem; he will slow the horse and put it back on. Then, he lost his left stirrup. It had now become essential to slow Ipso down. Instead, he speeded up.

The ring is bounded on three sides by a wooden fence. On the other side is a stonewall. As the speed increased, so did the horse’s proximity to these obstacles and the rider’s visions of eternity. He pulled on the reins, but without stirrups – and only five days of practice – he found himself completely unable to control the animal. Faster and faster it went. Around and around. We saw ourselves thrown into the stonewall…collapsing into a limp heap to be discovered later in the day with our head at a strange angle and a glassy look in our eye. The thought of Christopher Reeves, for whom we were often mistaken…and of Rhett Butler’s daughter, who was a much better rider…crossed our mind. We wondered who would close the shutters at night…who would write The Daily Reckoning…and who would give us a proper eulogy. We wondered what kind of a fool would take on a handicap so severe it proved fatal. We wondered how to get off the horse…

It is a disgrace, in the riding world, to be unhorsed. But there is nothing especially dignified about getting your neck broken either. We decided to try a maneuver we had seen in the movies – the dismount au gallop. We swung our right leg over the saddle and fell off to the left, while the horse was careening around a left-hand turn. The ground was soft sand. We expected to be trampled. We felt for broken bones. Everything seemed okay.

Ipso had come to a halt as soon as well had fallen. He stood there with a curious look on his face – something between satisfaction and contrition. You are supposed to get back on the horse when this happens. But we felt lucky to be able to stand up, let alone mount up.

We hobbled back to the stable. Two days ago, we could barely sit. Now we can barely walk.