«Commodities are the only attractively valued asset class»

Deutsche Version

After the collapse of Silicon Valley Bank and Signature Bank, financial markets have become very jittery again. Stress is also surfacing in Europe: In Switzerland, over the weekend, Credit Suisse was taken over by larger rival UBS, in order to stabilize fragile markets.

Despite these stress signals, legendary investor Jim Rogers is not worried about the very near term, «central bankers are scared after the collapse of Silicon Valley Bank, so things will be okay for a while». For the moment, the Fed will probably pause with rate hikes. Longer-term, however, he is convinced that inflation will come back with a vengeance, which will cause a painful bear market.

In an in-depth interview with The Market, which has been edited for clarity, Jim Rogers gives his view on the global economy, says which asset classes are still attractively valued and explains why there is no longer a sound currency anywhere in the world – not even the Swiss franc.

What is your assessment of the global economy and financial markets?

We had a big crisis in 2008 and to fight it, for several years governments printed, borrowed and spent money like never before. So, the world economy for a few years has been strong and continues to be somewhat strong because governments keep spending money. And it’s not over yet. We probably won’t have many more interest rate hikes, as central bankers are scared after the collapse of Silicon Valley Bank, so things will be okay for a while. However, when inflation comes back central banks will have to raise interest rates again and then markets will collapse.

Is the Fed done with interest rate hikes in this cycle?

No, I think for the moment they are done. However, when inflation comes back – and it will come back – further interest rates hikes will be necessary. In the 1970s we had such a big inflation problem that the Fed had to increase interest rates to the highest level in history. In the 1980s yields on United States Treasury bills rose to over 21%. And it worked! The president got re-elected, the economy went into recession but inflation come down.

Isn’t the stress in the banking sector a signal that monetary policy has become too tight?

It’s a signal that some market participants were overextended and yes, there will be more problems like that at a later stage. Right now, things will calm down, as Washington is terrified and the Fed probably won’t raise interest rates much further or not at all. But inflation will come back and interest rates will start moving higher again and then we will have a serious bear market.

Are the problems surrounding Silicon Valley Bank and other financial institutions preventing the Fed from fighting inflation effectively – i.e. it probably won’t raise rates by as much as it should?

They still could increase interest rates but they won’t. The Fed has already slowed down their hiking process as it looks as if inflation is coming down. They were already willing to slow down and the collapse of Silicon Valley Bank encourages them to thinking that they have solved the inflation problem and that they should not tighten too aggressively in order not to destroy things. But that is just going to set up the market for more increases later on.

Recession fears have subsided somewhat, but they are still lingering. Do you think a recession over the next twelve months is likely?

Everybody knows a recession is coming. This downturn is probably the best advertised recession I’ve seen in my life. I learned that if everybody knows something is coming, it usually doesn’t happen. So probably a recession is not imminent, but it doesn’t mean it’s not coming eventually and that it won’t be bad.

So maybe this year there won’t be a recession. And in 2024 we have the US presidential elections and usually the government ramps up spending to increase the likelihood of re-election. Could a recession be postponed to 2025?

That’s a good point, but what normally happens is since the incumbent administration knows the election is in 2024, it wants to make 2023 good and build up for good times in 2024. Given the historical precedent, it is more likely that 2023 will be good because the government will be doing everything to boost things up but by 2024 it is getting late and that is when you start getting recessions.

How should investors position themselves in this environment?

Usually, in a time like this, I don’t want to do much. I look around to find new markets. I have started to invest in a small way in Uzbekistan, this is a new market where good things are happening, but it is not easy to invest in Uzbekistan. I don’t want to jump into the big technology stocks such as Amazon and similar companies. I see them only as a trading opportunity, not as an investment as the serious bear market is not here yet and when you have a serious bear market the previous darlings go down the most. If you are a good trader there might be an opportunity. I am not a good trader so I don’t even try.

Aside from niche markets such as Usbekistan, how should a typical investor allocate their wealth?

There are not a lot of cheap assets around. Bonds certainly have been in the biggest bubble ever, many stocks have been or are still in a bubble, property markets from Korea to New Zealand are in a bubble. The only asset class that is not in a bubble is commodities. Silver is down 60% from its all-time high, Sugar is down more than 50% from its record high – these are not bubble numbers. So commodities are cheap and normally commodities do well with high inflation.

Do you focus on specific commodities or are commodities in general a buy?

The best way is to invest in an index, especially if you don’t know a lot about commodities. History has shown many times that investors are better off investing in a broad index – be it an equity index or a commodity index.

Would you also invest in mining companies and oil majors?

Of course, if you know the company well. There was a great American writer named Mark Twain. He once said, the definition of a gold mine is a hole in the ground with a liar standing at the top. If you know a lot about mining and if you know a lot about the company, invest in gold miners. But Mark Twain learned the hard way that mining companies can lose you a lot of money. Unless you know what you are doing.

When Mark Twain was around, ETFs weren’t invented yet. Or else he could have diversified his investments.

Indeed, ETFs are usually better for most investors than single stocks.

Where do you see opportunities in stocks?

The Japanese stock market is down about 30% from its all-time high and it certainly isn’t a bubble market. China is also down a lot from its all-time high, so there are markets that are still depressed on a historical basis. I am looking for opportunities in China and in Japan, I own ETFs on Japanese stocks.

What is your assessment of European stocks? They have been outperforming since October – is it a good time to buy or is it a trap?

I believe it is a trap. In this kind of market environment there are things that that go up a lot when the market recovers and that’s the kind of trade traders love to jump into. But I’m not a trader, for me it’s a trap, because the recovery probably won’t last long.

Doesn’t it help that in Europe there are more value stocks?

No, because when the next bear market comes, it is going to be worldwide and it’s going to be the worst we have ever seen. 2008 was very bad because of too much debt, but since then global debt has gone up by a huge amount, so the next bear market has to be the worst in my lifetime. And if we are going to have a very serious bear market, nobody is going to escape.

What do you make of the re-opening in China? Is it a net positive for the global economy or rather a problem because it will stoke inflation?

It will certainly help revive the global economy, given it is the second largest economy in the world. But it is not going to stoke inflation right away because the Chinese economy has been in the doldrums for a while. Inflation will come back because governments will print more money before this is over – that is all they know to do.

Is this potential comeback of inflation an argument against government bonds, even though yields have risen considerably?

Well, bonds have been in a huge bubble and usually when you have a bubble, prices react a lot in the other direction after the bubble has burst. As I said, interest rates reached 21% in the United States in the 1980s. And we are nowhere near that level right now.

Do you expect yields to go that much higher – the 10-year treasury yield reaching maybe 15%?

I am sure they will before this is over. Again, we have a serious inflation problem and it will get worse. We won’t reach those levels this month and also not in April, but interest rates will certainly go very, very high.

Given that many countries and companies are highly leveraged – can they bear higher interest rates? Won’t there be many bankruptcies?

There certainly will – we just had one some days ago in America! Global debt is higher now than at any time in world history. And that debt has to go somewhere. Whenever we had staggering levels of debt, we either resolved it through bankruptcy or money printing.

What is another item high up on your list of worries?

Again, we had the crisis in 2008 because of too much debt. Since then, the debt everywhere has skyrocketed. In 2008, China could bail us out, as it didn’t have much debt then. Now, even China has a lot of debt. Everyone has a lot of debt. And that is one reason why I am worried that the next time a crisis hits, we are going to have a very serious problem. America has become the largest debtor nation in history, only forty years ago, the US was a creditor nation.

And the solution would be to inflate the debt away?

Historically, you either had too much inflation or you had huge defaults. That’s the way it has always worked in the past. Conceivably, politicians could start saying: Oh, we have a debt problem. Elect me and I will solve it. However, if politician then start cutting spending and start repaying the debt, people will not tolerate the harsh measures. Consequently, that politician will be thrown out of office or assassinated, because the pain would be too much for voters to bear.

Alternatively, you can default, which would also be painful though somewhat less so than the spending cuts. Or you could inflate the debt away and that is usually the easiest way. For hundreds of years politicians have learned to just print more money. When the Romans got into too much debt, they started debasing their money by changing the amount of silver in the coins. And sometimes too much debt even leads to war, which is another way to get rid of the debt.

That brings us back to owning hard assets, like commodities.

That is certainly one possible approach. I own silver and I expect to buy more silver and more hard assets in general, because historically, if you have inflation or chaos, the way to protect yourself is with real assets.

What are some of the signals you keep an eye on to gauge whether the next downturn is looming?

Usually, when everybody gets excited about stocks and equity markets go up a lot you can sense that the market is approaching a state of hysteria and that is typically the end. We had that kind of hysteria a few weeks ago, and it will probably come back and I hope when it comes, I will be able to read the signs. However, nobody is going to ring a bell and shout: «This is it! This is it! This is what we have been waiting for!»

What is your view on the Swiss franc?

Historically, the Swiss franc has been a less troubled currency. But now even the Swiss National Bank has done some strange things with your money. The franc used to be backed by gold and sound reserves and now it is backed by shares of Apple, Amazon and Samsung. I worry about the Swiss franc certainly more than I ever did in my life. That leads me to the question: are there any sound currencies? I don’t know any sound currency now.

Maybe the renminbi?

Not even the Chinese currency is sound. Thirty years ago, there was very little debt in China, but now even China has a lot of debt and the currency is not convertible. It is hard to find a sound currency. The US has done a lot to debase the dollar, which used to be the international reserve currency and it was supposed to be completely neutral, so that anybody in the world could use it. Now, however, if the US doesn’t like you, they cut you off from the dollar system. And people start wondering: Wait, that’s not the way it is supposed to work. An international currency is supposed to be neutral. Now even America’s friends are looking for an alternative to the dollar. I don’t know what it is going to be yet, but the world is being forced by Washington to accelerate the change, because Washington ruins you if they don’t like you. Maybe gold and silver are temporary solutions, but they have their own problems. In the end the world needs a new international currency, but I haven’t found it yet.

Bitcoin is not the solution?

No. Many countries around the globe are looking at introducing cryptocurrencies. Governments like control and power, and I assume they will say: You can use computer money, but it will be our computer money.

Jim Rogers

Photo: ZVG

The American investor and author (“Street Smarts”) Jim Rogers made a fortune in his younger days as a business partner of the financier George Soros, with whom he ran the successful hedge fund Quantum Funds in the 1970s. Only thirty-seven, he turned his back on Wall Street to travel the world. He summarized his experiences in the books «Investment Biker» and «Adventure Capitalist». During his travels, he came to the conclusion that the world is in for a long commodities boom. The importance of China and the potential of commodities were described in the books «Hot Commodities» and «A Bull in China». For a time, Jim Rogers was a visiting professor at Columbia University’s Business School. In 2007, he moved his family to Singapore, convinced that the twenty-first century will be Asia’s century.