The Next New Thing

Jim Rogers is best known for his swashbuckling adventures in remote corners of the globe, as documented in Investment Biker and Adventure Capitalist. But now he brings us something different…a book of practical investment advice. What’s the latest investment to have caught Rogers’ eye? All will be explained…

A new bull market is under way, and it is in commodities-the “raw materials,” “natural resources,” “hard assets,” and “real things” that are the essentials of not just your life, but the lives of everyone in the world. Every time you walk into the supermarket or the mall, you’re surrounded by commodities that are traded around the world. When you get into your car or truck, you are surrounded by other widely traded commodities. Without the commodities, “futures markets” to set and regulate prices, the things we all need in life would be scarce and often too expensive. These essentials include oil, natural gas, wheat, corn, cotton, soybeans, aluminum, copper, silver, gold, cattle, hogs, pork bellies, sugar, coffee, cocoa, rice, wool, rubber, lumber, and the 80 or so other things listed in the traders’ bible, the Commodity Research Bureau (CRB) Yearbook.

Commodities are so pervasive that, in my view, you really cannot be a successful investor in stocks, bonds, or currencies without understanding them. You must understand commodities even if you only invest in stocks and bonds. Commodities belong in every truly diversified portfolio. Investing in commodities can be a hedge against a bear market in stocks, rampant inflation, even a major downturn in the economy. Commodities are not the “risky business” they have been made out to be. In fact, I believe that investing in commodities will represent an enormous opportunity for the next decade or so.

For most investors, commodities trading is a land of mystery full of legendary dragons. Intelligent, well-informed people who can recite P/E ratios of large caps and small caps, who study the balance sheets of high techs and biotechs, semiconductors, and small banks in the South, self-proclaimed “savvy investors” who follow bond prices and yields more closely than the baseball box scores and who might even have an eye on the dollar versus the euro, the yen, and the Swiss franc, know nothing about commodities. And if they do know something, it’s typically second- or third-hand information, usually mistaken, and, more often than not, involves a cautionary tale about “a brother-in-law who lost his shirt in soybeans.” Like Americans who never travel to foreign countries for fear of being humiliated or cheated because they don’t know the local language and customs, investors who shy away from commodities are missing out on an incredible opportunity.

You cannot ignore an entire sector of the marketplace-not if you really want to be considered an “intelligent investor.” If a friend of yours who was heavily invested in the stock market went through the 1990s without even considering buying a technology stock, and ignored what was happening in the world of Microsoft, Cisco, Amazon, eBay, and even IBM, surely you would find such behavior strange. Yet that is precisely what most investors have done with respect to commodities.

Commodities Bull Market: The Perils of Ignorance

One reason that companies and stocks did so well in the 1980s and 1990s was that raw materials were in a bear market: Cheap commodity prices removed the cost and margin pressures from companies that depend on natural resources to do business. Investors who figured out that the commodity bear market was ending in the late 1990s realized that the stock bull market would be ending, too. The CNBC anchors were still giggling with glee, still advising to buy more dot-com shares, while the smart investors were exiting the market and moving to commodities. They could see that the costs of doing business would soon start eating away at profits-and that stock prices would soon follow.

It is hardly the bush leagues. In fact, natural resources are the largest nonfinancial market on the planet. The annual production of just 35 of the most active commodities traded every day in New York, Chicago, Kansas City, London, Paris, and Tokyo is worth $2.2 trillion. The volume of dollars traded on the commodities exchanges is several times that of the common stocks traded on all U.S. stock exchanges. (Commodities dealings for many times more than that amount take place outside the commodities exchanges.)

And wherever there is a market, there are opportunities to make money. I know-the business pages of your newspaper, the financial magazines, and CNBC devote most of their time and space to stocks. According to the media and other stock-market “experts,” the equities bull is forever hiding just around that next corner on Wall Street. But millions of investors who listened to the experts back in 1998-2001 about “the New Economy” got hammered in the stock market and are still trying to get back to even. The smart investor looks for opportunities to acquire value on the cheap, with one eye out for a dynamic change in the offing that might make that investment even more valuable.

Today, commodities fill both bills. The commodity bear market ended in 1998, when prices were approaching 20-year lows (equal to Depression levels, when adjusted for inflation). That year Merrill Lynch, the largest brokerage firm in the U.S., decided to leave the commodities business, and I began a commodities index fund to capitalize on the end of the bear market.

Commodities Bull Market: What Could Be More Straightforward?

I am convinced that value and strength in the commodities markets will continue for years to come-that we are, in fact, in the midst of a long-term secular commodities bull market. The twentieth century saw three long commodities bulls (1906-1923, 1933-1953, 1968-1982), each lasting an average of a little more than 17 years. The new millennium has begun with another boom in real things. In my opinion, it began in early 1999.

There is no mystery to it. What could be more straightforward in this world than its very basic materials? Corn is corn, lead is lead, and even gold is just another thing whose price depends on how much of the stuff is around and how eager people are to own it. And there is certainly no magic to figuring out the direction in which prices will go in the long term. These alternating long bear and bull markets in metals, hydrocarbons, livestock, grains, and other agricultural products do not fall from the sky. They are prime players in history, the offspring of the basic economic principles of supply and demand. When supplies and inventories are plentiful, prices will be low; but once supplies are allowed to become depleted and demand increases, prices will rise, just as inevitably.

It has not taken any genius on my part to understand this dynamic; it’s just the way the world works. But the investor who sees this supply-and-demand balance going out of whack and is willing to put some money on the table will be rewarded many fold.


Jim Rogers
for The Daily Reckoning
January 19, 2005

Editor’s Note: Jim Rogers helped found the Quantum Fund with George Soros. He has taught finance at Columbia University’s business school and is a media commentator worldwide. He is the author of Adventure Capitalist and Investment Biker. He lives in New York City with his wife, Paige Parker, and their 18-month-old daughter, who is learning Chinese and owns commodities but doesn’t own stocks or bonds.

The essay you just read was taken from Jim’s recently released third book, Hot Commodities. You can order your copy here:

Hot Commodities

By way of illustration, sugar went up 60% last year…in fact, over the past two years, commodities have done more than eight times better than traditional stocks. The opportunity for profit is enormous…and there is no end in sight. To learn about the simple system that allows you (and your wallet) to benefit from commodities, see here:

Resource Trader Alert

“Liquidity, to us, is oxygen; we need it to function.”

Those words were spoken by Eric Feldstein, CEO of GM. The giant automaker is still giant. But, as Mr. Feldstein recognizes, no longer really an automaker. Yes, it makes cars and trucks. But it makes them out of habit as much as anything.

The company needs “liquidity”…that is, it needs access to cash. For what, you might ask? Is it putting in a new stamping plant somewhere – from which it will build the world’s most modern and sophisticated cars? Is it hiring a new generation of machinists – to produce a new generation of internal combustion engine? Is it raising wages at its plants – to attract boys from farms of Illinois and Iowa onto the assembly lines of Michigan?


GM needs cash for a variety of reasons – most of which have little to do with producing things with wheels.

You will recall, dear reader, when the business of America was business…and whatever was good for its leading business was good for America itself. But now America’s leading business has become a working illustration of what is wrong with late, degenerate capitalism. GM no longer makes its profits from manufacturing – what money it earns it makes from finance. GM needs liquidity so it can lend it out again – at a higher rate. It also needs liquidity so it can pay the interest on past borrowings…and pay the thousands of pensioners all over the country that counted on the industrial giant for their retirements.

Borrowing to lend is not a bad business – as long as the customers and rates cooperate. But it is a different business from making cars, one with its own problems. The “oxygen” has to be available at the right price…or you suffocate.

News came in yesterday that the United States got another big whiff of that precious gas in November. Foreigners were reassured Bush’s re-election, said press reports. They increased the pace at which they are buying up U.S. assets – to more than $80 billion for the month. This was more than enough to balance the books; the record trade deficit was only $60 billion. Indeed, there was a little left over to help raise bond prices.

We add that to our growing list of mysteries: Why should the foreigners be reassured by George W. Bush’s re-election? It seems like a cause for alarm to us. For in addition to the $2 billion per day trade deficit, the Bush Administration has allowed another $1.5 billion per day federal deficit. The current yield on a 30-year Treasury bond is only 4.69%, which makes us think that bond buyers are not merely optimistic, but delusional. A 10-year note yields only 4.19%. What are the poor schmucks thinking? Maybe they are thinking what we are thinking…that we would not be surprised to see low yields for a very long time (the likely consequence of a Japan-like slump). But we do not invest on the basis of guesses and hunches. We fall back on the essentials. The real yield from Treasuries is barely 2%. We would want a higher yield before lending to the world’s biggest debtor.

Everyone is likely to be surprised. The foreigners will be happily surprised if the Bush crew actually does try to do as it has promised and cuts the deficit. Then, the United States will sell fewer bonds overseas. Bond prices will rise – yields will fall. And readers will ask us why we pooh-poohed Treasuries at the beginning of the year.

Americans will be surprised too. They will look with favor on Bush’s efforts to cut the deficit (as will we, here at The Daily Reckoning…we never met a tax or spending cut we didn’t like)…and then they will wonder why the economy is collapsing. Because the world economy depends on U.S. spending. And there are only three big spenders in the nation. The consumer is the one who has been doing the heaviest buying. He’s used his credit card so much it has practically melted down. But he is can do little more; he is almost out of money. “U.S. Retail Sales Growth to Slow,” says The Financial Times this morning.

That leaves the government and business. And if the Bush Administration cuts back on its spending, all that is left is business.

Which brings us back to GM. The company is already gasping for air. It has one of the world’s biggest debt piles – which, according to today’s press reports, is “teetering on the brink” of junk status. It is hardly going to begin a marathon of new production; not when the Chinese are warming up to compete…with much cheaper cars.

As the economy sinks, GM will wheeze. Treasury yields may go down. But GM cannot print money the way the Treasury can. Lenders will begin to wonder if GM will be able to make good on its debt. They’ll ask for higher yields. Result: GM’s cost of funds will go up…even as Treasury yields go down. Secondary result: GM will have to cut back its own spending. Tertiary result: The whole economy will fall into a long, soft, slow slump… just like we said it would.

More news, from our team at The Rude Awakening:


Tom Dyson, reporting from Baltimore…

“Imagine this: Unemployment starts rising, and the consumer stops spending. Economists call it a retrenchment. Bond yields keep falling, as investors seek cover from falling stocks, just like 2001 and 2002. And as he did then, Greenspan will be watching the bond market like a hawk. He’ll be making sure longer-term yields don’t fall so far as to be lower than the short-term rate the Fed sets.”

More the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:

Who Said Trading Was Difficult?


Bill Bonner, back in London:

*** Housing is still rising…The LA TIMES reports that abodes in LA County rose 21% last year. Down in La Jolla, says Richard Russell, they’re up 27%. And the median price for a house in Orange County rose to $551,000 last year.

Everyone in the state of California must be a genius. Or, at least he thinks so.

But here too, we see a mystery…and an existential question: Why would a house be worth more one year than it was the last? Does its roof shed water better? Is its rec room less of a wreck than it was 12 months ago? Is it warmer? Cuter?

On the contrary, does it not render exactly the same service it did last year?

Capital growth is a fraud; we keep repeating ourselves.

Here in London properties have already begun to fall. Our colleague Merryn Somerset Webb reports that she put her flat up for sale two months ago. So far, only one person has looked at it, even though it is located in a desirable part of town and priced below similar apartments in the same building. London led the global property boom up…it seems to be leading it down too.

*** Poor little Edward. The boy, 11, was playing with his friend from across the road on Saturday. The other boy threw a tennis racket that hit Edward squarely in the mouth. He came into the kitchen with blood pouring down his chin.

His father has been known to faint at the sight of his own blood. Realizing that he was the only adult around, he steeled himself and had a look. Hmmm…. two teeth had been broken off…and two were knocked out completely. Ooh la la…

The two knocked out teeth, were still there….held by the child’s braces. So, we rushed to the local emergency ward…where a doctor told us the two teeth might be surgically re-inserted…if we moved fast enough. So, back in the car…we rushed Edward up to the hospital in Poitiers.

Edward was very brave and calm. He never cried. He never complained. We wondered if he were in shock.

The hospital was almost empty. An attractive young blonde woman had been called in to do the dental surgery. Within a few minutes, Edward was asleep and the woman was at work on him.

We waited about two hours…hovering over Edward as he woke up.

“Edward…? Edward? Are you awake?”

“Huh…where am I? What happened…?”

“You’re in the hospital…remember…they had to reinstall two of your teeth…you had an operation….and the doctor thinks it will be successful. So, you’re going to be as good as new.”

“It must have been one hell of an operation…” he mumbled and drifted back to sleep.

*** A letter from Byron King:

“You have outdone even your usual humble self these past couple of days in The Daily Reckoning. Your essay on chateaux as money pits hit home, even to humble me with my humble abode in humble Pittsburgh. (Yes, I fit in well… being so humble, and with so much to be humble about….)

“Our Pittsburgh weather has been unseasonably warm in the past couple of weeks. Good. Let others freeze elsewhere, I say. To my mind, every day of unseasonable winter warmth means one less day of a gas bill to fire the boiler to make the steam to heat my house with the leaking roof. Thus I am saving precious and depleting natural gas, some of which I know comes from wells drilled into the Devonian sandstones and raised at great cost from deep beneath the rolling hills of western Pennsylvania. Hence, I am saving Devonian sandstones, not that those ungrateful Devonian bastards care. And I am saving myself some dinar, which otherwise would go to pay the utility bill.”

*** We dined last night at the Garrick Club, one of London’s oldest and most prestigious gentlemen’s clubs. At least, it appeared old and prestigious…we’ll keep saying so until someone tells us differently. There is a waiting list to get into the club. It takes about 5 years from the time you are “put up” for membership, Lord Rees-Mogg explained. But members of other clubs – such as your editor – get to use the place on a temporary basis.

“This place is great,” said our daughter and dinner date, Maria. “But everyone is so old and soooo British. You’re going to have to learn to stutter and give a good harrumph from time to time.”

“Even the food is good here,” she went on. We were finishing a very good English meal with very good figs and cream. “You know, everyone says English food is terrible. But it’s not all terrible. 98% of the English eat terrible food. The other 2% eat very well.”