February 25, 2008
The Developed World is Disappearing
From an interview with Jim Rogers in the May 6, 2002 issue of Barron’s:
“The 21st century is the century of China,” says Rogers, noting it has the second-largest foreign-currency reserves in the world and a population of 1.3 billion. “Everybody should teach their children and grandchildren Chinese.”
He opened an account in Shanghai in 1999 and bought a basket of “B” shares, the shares of Chinese industrial companies allotted to foreigners. “Haven’t sold a one, and don’t plan to sell a one,” he asserts, adding that Shanghai is the place he would most like to move to and may do so for “a year or so.”
“There is no question China is going to dominate all of Asia and the whole world eventually,” he says. China’s dynamism in the region is evident in the vast expanse of Siberia that lies west of China. The Chinese are moving in, opening businesses and leasing farms supported by Japanese capital, attracted by Siberia’s abundance of raw materials. China supplies what it is rich in, labor. Rogers contends the Chinese eventually will “reclaim” Siberia.
And this, from a cover story on Rogers in the June 5, 2006 issue of Barron’s:
China is now the No. 1 consumer of copper, steel and iron ore, and No. 2 in the use of oil and energy products to feed its industrial maw, which is growing at a prodigious rate of nearly 20% a year. And the torrent of textiles, refrigerators, color TVs and computers aren’t just flowing to overseas outlets like Wal-Mart. Burgeoning economic growth is also creating a Chinese middle class aspiring to better meals and more creature comforts. In Rogers’ view, it’s delusional to deny that competition for commodities will continue to heat up as a result of China’s pell-mell rush from a peasant economy to economic giant. Today, there are only 30 million private vehicles on the roads in China, versus 235 million passenger vehicles in the U.S., even though China has almost 4½ times as many people.
So far, the scramble for natural resources has mostly affected energy and metal prices. But Rogers thinks the price boom will soon spread to “soft commodities” (like cotton, sugar, coffee and wool), rubber, lumber and — perhaps most telling — grain and oilseeds. Already, lots of corn and sugar production is being siphoned off into ethanol output.
“Future Chinese demand under their ‘People First’ campaign will be enough to push up prices in these sectors,” he says. “In some grains, for example, stocks are beginning to tighten despite global bumper crops in recent years and an absence of major droughts. Despite low per-capita soybean, meat and chicken consumption by worldwide standards, China is already a major importer of soybeans and other grains and figures to get even bigger as diets improve.”
In the summer of 1998 when Rogers, wary of the then-roaring U.S. stock market, concluded that the future lay in commodities and developed a proprietary index of 35 of them, each with a futures market. They were weighted in line with his view of their relative importance in global industrial and food consumption.
Thus, he included azuki beans and rice in his grain and oilseed category, comprising in all about 20% of what was grandly dubbed the Rogers International Commodity Index, or RICI. Other commodity indexes ignore them. The Rogers Energy sector (crude, heating oil, unleaded gas, etc.) was assigned a weight of 44%, far lighter than the more price-sensitive weighting of over 65% that energy recently commanded in the popular Goldman Sachs Commodity Index. Industrial metals, from aluminum and copper to zinc and tin, have a 14% rating, nearly double the 7.1% weighting given precious metals. The latter is an indication that Rogers is hardly a gold freak. Finally, the index is rounded out by the afore-mentioned soft commodities and livestock.
The RICI was born on Aug. 1, 1998.
Now that was some spectacular timing.
February 25th, 2008 at 8:27 pm
Rogers rules. Great writer, good analyst, good man. His latest book on China is an interesting read.
February 26th, 2008 at 4:11 am
Daily price limits were removed at the MGEX today. March HRS is up almost $4 today. Other wheats were limit up (only 60 cents) but that should change to 90 cents tomorrow. I’m starting to get a little scared. I was wrong the last we chatted, the March contracts expire this week. So next week when the May contracts move to the front that may keep a lid on things for a few days maybe ;-)
February 26th, 2008 at 6:09 am
Rogers didn’t do so bad with his long Yen call at the start of 2007 either. But as he says so himself, he’s the worst short term market timer. ;)
February 27th, 2008 at 2:37 am
Amazing dude. Some people have hard time crawling; some do have hard time walking; some do have hard time running; yet some are able to invent wings to fly. One of those guys who can see through the maze.
February 27th, 2008 at 10:07 am
Jimmy’s clients, and hopefully he himself too, lost a lot of money when Revco, the futures folks, went bye-bye. So he is down on the US where he has doubtlessly been sued for inattention or worse.
That said, he is one of the few I know of who was pushing commodities in the late 1990’s at their lows. He has to be a Kondratieff devotee, as I am, because the whole “intelligent” world was deeply into deflation forever. Paul Krugman, the anti-war correspondent for the NY Times and former economist, comes swiftly to mind in that regard.
Wisely, Jimmy has generally preferred to invest in China and other global hot spots via the commodities they need. I suspect we will see that wisdom vindicated once more as well.
GCC is currently my favorite unleveraged vehicle for commodities: an unweighted index of US-traded commodities actually using futures which are tax-advantaged for Yankees.
February 27th, 2008 at 10:14 am
Tom D: The June 5, 2006 Barron’s piece mentions the Refco fiasco but they’re pretty sympathetic to Jimmy about it, and I’m not sure how the tied-up money got resolved.
Gary Shilling wrote a couple books on deflation in the late 90s, I think.
I have to look again at the various commodity ETFs … the last I looked they were all pretty illiquid with the exception of DBC, but that was awhile ago and things have changed.
February 27th, 2008 at 10:25 am
Mind you, actual paying clients did not lose money because of Revco, since the commodity clearing houses in the US just close down the brokers and move the accounts immediately. So if they lost money it was due to poor advice, poor markets, or their own fault. But banks in Austria and elsewhere who were to loaning to Jimmy’s clients or their own got cleaned and were not amused.
You are correct that DBC is probably still the most liquid and is reasonably representative ETF of the whole spectrum. For trading it is probably the best. But I like the unweighted funds for the long term, so liquidity isn’t as important. I think there are another ten to fiteen years in this bull market–not every day or month, mind you–so I am not trading it.
I’ve been writing about this whole area quite a lot over the past year. Well actually for almost ten years.
February 27th, 2008 at 10:40 am
Tom D: I’m not sure what you’re saying about Refco and Austrian banks, etc., but here’s the bit from Barron’s:
“… Refco, filed for bankruptcy after apparent malfeasance by top Refco executives was discovered. Some $370 million of Beeland funds’ excess margins ended up trapped in an unregulated unit of Refco, rendering Beeland just another unsecured creditor in the bankruptcy. As a consequence, the Beeland funds were shut amid a hail of lawsuits between Beeland and Refco and by investors in the funds seeking recovery of their money and damages from Rogers and Beeland, among other defendants.”
February 27th, 2008 at 10:49 am
That’s what I meant about being sued for “inattention” or worse. Excess margins are never part of the broker’s funds unless authorized or by fraud. The word “apparent malfeasance” could cover either case. There were suggestions that deals had been made between Rogers’ people, the Austrian bank, and Revco. I don’t know how it turned out in court. It was very unusual for US commodity brokerages, although Revco had been Hillary’s famous broker when she was a cattle trader.
February 27th, 2008 at 11:52 am
Oh my! Louis Farakhan says Obama is the “Herald of the Messiah”. Can reparations be far behind? Jesus Hussein.
http://tinyurl.com/2c5ntx
February 27th, 2008 at 11:56 am
Sorry, but it seemed illustrative of the header: “The Developed World is Disappearing”
February 27th, 2008 at 12:01 pm
Tom D: You have to quit cluttering the comments section. :)
February 27th, 2008 at 12:05 pm
Yes. I’ve always had a problem with trendy opinion. I’ll try harder. Yes I will.