When Jim Rogers Talks, Korea Listens

Yesterday I had an interesting lunch put on by Sentry Select mutual funds--I should plug them as they were nice enough to give me a free lunch and a talk by Jim Rogers. Ostensibly, it was to promote his book (Hot Commodities) but we know that Sentry is in the business of selling mutual funds and other financial products and it just so happens that Mr. Rogers' talk boosts their area of expertise: commodities.

Jim (as I'll call him because it invokes a little bit of insidership, that and I'm too lazy to write Rogers every time) has been around the world twice. Once on his motorcycle (he wrote a book on it) and again in a custom Mercedes Benz (with is fiance, now his wife...he has a baby girl now, too...and he wrote another book after that trip also). His incredible claim to fame was co-founding the Quantum Fund with George Soros--this quintessential hedge fund made 4,200%+ for investors in the 1970s (if you run the numbers the compound rate is pretty tremendous). He is also featured on CNBC a lot. His last trip was 3 years long and covered 245,000 miles, so I think me may have a good macro-view of things.

But, about his talk. He is bullish on China: so much so that he has a Chinese nanny for his baby-girl whose explicit instructions are to speak Mandarin exclusively to the tot. (He notes that Russia is run by the mafia and India is a shambles--where even Indians give up on returning to the place to make a fortune--so China is where it's at.) He points to the savings rate of Chinese (35% vs. 2% in the U.S.) and how they are plowing incredible amounts of money into infrastructure (Russia's corporate leaders are more interested in siphoning money out to Switzerland or Lichenstein and the 'main highway' in India has an average speed of 12 mph compared to 45 mph in China). He sees a hard landing (quick recession after super-heating the economy) for China in the next couple of years, but that is a buying signal (buy in the dips) as the average commodities bull market has lasted 15-23 years (and we're 5-6 years into this one) and China is a BIG buyer of these things (but the party should end at about 2014 or 2022).

Thus, he sees commodities as a good investment for the long term. Financials are OUT, he says; take a look at the S&P500: it was 30% Utilities in 1981; 30% TMT (technology, media & telecommunications) in 1999 and now it's about 30% Financials. Guess what, in successive years those were the losers. He also points to a study by Yale and University of Pennsylvania that concluded that if an investor put their money into the underlying commodities rather than the basket of stocks that mine, refine or sell those commodities (of course you could pick the winners, but that's a mug's game) they would have made 300% more money! It's no surprise that the second reason he's in Vancouver (other than to flog some books) is to promote his 6 year-old RCIC commodities index (which happens to be the best one in the world, up 184.78% since August 1998--that's 17.7% per year!). He's already inked deals so that American investors can buy his index and recently launched a Japanese version...and next is a Canadian one (in negotiations, although there is a way Canadians can buy the American one).

Now if commodities aren't your thing he has a few recommendations that come from his findings: don't have money in USD...the Fed's stated policy is that it is fine with devaluing the USD. And since financials are not the place to be, he's shorting Fanny Mae and home building stocks in the U.S. He says if you're going to buy real estate in the States then buy in Iowa (cuz all them farmers will have a lot of money) and not Massachusetts (where the financial firms are). Also, the U.S. is not a big producer of resources. Canada is, however. He like the CAD because all we have are resources and we can sell them not only to China but to the U.S. (Incidently, he thinks the U.S. will be a big loser by the beggar-thy-neighbor policy of softwood tariffs because we have the goods and they need to buy them...and if we say "Screw the U.S." we can sell to China in a heartbeat.)

He sees China as being a big importer of goods, as mentioned, and the yuan will float in 2-3 years or so. It has already gone from being an exporter to an importer of cotton, crude and other raw materials and this trend will continue. He loves ags (agriculturals like grains, cotton and soy) but also energy (oil, natural gas--he owns some of the Canadian tarsands stocks) and metals. Not really gold, because, as he puts it, it's useless--except for a few industrial applications. The problem with gold is simple supply and demand: in 2003 75% of metals exploration budgets were to find gold (so there will be more coming for sale soon); the Central Banks of the world hold 30-40 years worth of current production in their vaults and they are either in the process of selling it or looking into the idea; and for the last 25 years gold production has risen but there are no new uses for the stuff. He said, "Sugar is better than gold." Wow.

On metals, he likes things like lead. Not sexy, but also profitable. There is no new production or exploration for lead (and other orphaned metals) and new supply takes years (maybe decades) to find, get permits for, excavate and refine. The latest, most modern lead smelter in the U.S. was made in 1969...nuff said. Then there's uranium. China and other countries will be using more nuclear energy (like it or not) and uranium will be in short supply because (i) no one is really looking for it (everyone is after gold); (ii) once you find it environmental and regulatory forces make extracting and refining it an arduous chore; and (iii) even if you can do that it takes many, many years to get the stuff to market. Also, the stockpiles are dropping so supply shortages alone could pump up the price (oh ya, and Canada has a lot of it in the ground).

What are the biggest risks in investing these days?
I. The U.S. financial system. Enron and its pals have shown us that people can really screw up a company like there's no tomorrow. But...copper doesn't lie.
II. U.S. financial stocks. These are at risk from systemic problems as well as a choppy market.

So, what does this have to do with Korea? As in this story, its like Korea was in the room listening to Jim speak...they've taken to paring down their USD reserves and moving to CAD and AUD (Aussie dollar) ones. Go figure, for once the Korean government seems to be on the cutting edge!

UPDATE: Interesting excerpt from his book here.