Viewpoint: Jim Rogers

Asia: Future Perspectives
Biographies: Jim Rogers

Jim Rogers grew up in Alabama and started out in business, aged six, selling peanuts and soft drinks at baseball games. He was educated at Yale and Balliol College, Oxford. After he co-founded the Quantum fund in 1970, the fund surged by 4,200% over the next decade, while the Standard & Poor’s index rose by 47%. Having earned enough money to “retire” at the age of 37, Rogers has since worked as a professor of finance at Columbia University, columnist, author, and a contrarian investor. In the early 1990s he traveled 100,000 miles through six continents on a BMW motorcycle and ended up with a portfolio of investments in some of the world’s most unexpected markets. In 1998 Rogers became bullish about commodities, predicting an enduring commodities rally and later launched the Rogers International Commodities Index. Believing that the future belongs to Asia, he sold his mansion house in New York’s Riverside Avenue in 2007 and now lives in Singapore, partly so that his two young daughters can learn Mandarin. Unknown element imgthumb Unknown element imgmain

Why do you think capitalism appears to be working better in Asia than in Western democracies at the moment?
It is because in Asia they’re fresher at it and they haven’t yet had the chance to get corrupted and corroded. In China, they still call themselves Communists. They didn’t have a stock market 20 years ago, nor did Vietnam. Thirty years ago Mao Tse-tung was still running China; Indira Gandhi and Nehru were ruining India; East and West Pakistan had just had a big split; Vietnam had been destroyed by war. So, 30 years ago Asia was not in the game.

Is the current financial crisis a tipping point, with developed nations losing their status as financial centers and Asian centers taking over?
Yes, definitely. This is a period that we will look back on and say, “Oh, yes, that’s when it all really changed.” The money now is in Asia. The largest creditor nations in the world are China, Japan, South Korea, Taiwan, Singapore, and Saudi Arabia. Forty years ago none were in Asia. Experience tells us that; money is not dumb. It goes where the money already is; everybody follows the money. That’s why New York became the world’s financial center: because America had the money, the balance of trade, the reserves, and the economy. But America doesn’t have the money any more and nor does the United Kingdom.

If Asia is poised to take over as the world’s next financial center, which city do you think is going to be dominant?
No single financial center has emerged in Asia yet. Singapore and Hong Kong are working at it, and they both have a lot going for them. Hong Kong has a negative, which could turn out to be a positive, in that its neighbor is China. China has a blocked currency, so it cannot emerge yet. Seoul is saying that they want to become one, but they still have a host of unbelievable regulations, and even the Koreans themselves aren’t on top of these regulations. You can’t have a financial center without a free flow of capital. There’s no free flow of capital in South Korea right now.

Viewpoint: Jim Rogers

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Do you believe Singapore or Hong Kong more likely to emerge as Asia’s leading financial center?
I think it’ll be Singapore, at least in the medium term, because no one really knows what’s going to happen with Hong Kong and China. Dubai says it wants to, but Dubai is essentially a short-sell now. There’s also Tokyo. Over the last 40 years, Tokyo should have been emerging as a financial center. On paper it looks like it ought to be the world’s financial center. The trouble is that, for whatever reason, the Japanese just don’t want to open up to the outside world and keep doing ludicrous things, like having their interest rates at almost zero.

Why do believe that Dubai was a short-sell?
Dubai’s “model” has been to develop the country and the economy based on real estate speculation. They don’t have any oil; they ran out of oil. So they’ve come up with all these fabulous plans on paper to become a media center, to become a high-tech center, an entertainment center, etc. It’s all based on massive amounts of real estate speculation with borrowed money. Now, maybe their cousins in Abu Dhabi will continue to bail them out, but it’s going to be a big, big, big bite to bail out.

What lessons do you think the developed economies can learn from the banking crisis? How should they be reforming their financial systems to ensure they can recover?
The lesson that they should learn is to let the market work. During the past 15 years, in the United States especially, they refused to allow the market do its work. Alan Greenspan swore every day that he believed in market forces, but every time there was a problem he over-rode the market. If he had allowed “Longterm Capital Management” to go broke, we would not have had these problems now. That allowed people at Bear Stearns and Lehman’s, who were incompetent before, to carry on. Instead of licking their wounds and learning how to drive cabs, they went off looking for the next fish to fry. At the time everybody thought Greenspan knew what he was doing. But if you look back at some of the things he said, we now know he was a fool. Through his policies, he goosed up a consumption and a housing bubble. He said, “The derivatives markets are great. They’re a fabulous thing to help the financial system.” He came out and said all these things out loud, officially, under oath.

Do you think derivatives will have to be more tightly regulated?
There’s no need. The markets have taken care of that. Do you think anybody is out there writing derivatives now? There are simply no buyers out there. The regulators still don’t understand derivatives.

What is the commercial bank of the future going to look like do you think?
They are going to take deposits and make loans to people they know, and they’re going to make a living. Securitization will come back someday but, if and when it does, it will be on an entirely different basis. It will be pretty straightforward and transparent. One thing that was lacking in the market before was transparency. Nobody could see what they were buying or selling. Some of these derivative instruments had offering circulars of over 1,000 pages, which I doubt anybody read, including the people who wrote them. Nobody knew what was in this stuff.

Were the people who bought those things greedy or naive, or both?
Well, I guess they were certainly naïve. I hope they were naïve, maybe they were just crooks. Greedy? Well, everybody was out there trying to make as much money as they could. The first securitizations were fine.
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What is the investment bank of the future going to look like?
Well, it’s going to look like the investment bank of 20 years ago. There was nothing wrong with the model back in 1929; it’s just that everybody went out and did some strange things with the model. And it had a revival, but some of the practices are yet to have a revival.

Does this mean the United States is effectively bankrupt?
There’s no doubt about it. Greenspan and Ben Bernanke have ensured the demise of the Federal Reserve. America has had three central banks. The first two disappeared and these two clowns have ensured the current one will also disappear. Bernanke tripled the balance sheet of the Federal Reserve in something like four months and filled it with garbage. The Federal Reserve used to have almost 100% government bonds; now it’s got who knows what percent of garbage. I wrote this in a book five years ago, expecting the Fed to disappear some time after 2010. I think it could happen much sooner now. A year ago, the US government had debt of about US$5 trillion, which had been built up over the 200 years of the republic. Then, over a single weekend in September, Hank Paulson doubled that. He did this by assuming the debt for Fanny Mae and Freddie Mac, which had US$6 trillion of debt. Some of that debt perhaps has good assets behind it, but Fanny Mae and Freddie Mac also had untold trillions of off-balancesheet derivatives. The government assumed those as well. In taking over AIG, the government assumed untold trillions of AIG’s off-balance-sheet derivatives obligations. The government tripled or quadrupled its debt in a few months.

What are the key challenges facing President Barack Obama?
Obama ran on a platform of taxing capital and protectionism, and won, at a time when the world knows that those two platforms are crazy. But he did it. Throughout history we know that the taxation of capital has been a disaster. It leaves a country with less capital and, if that’s done during a crisis, it makes capital flee. As for protectionism, that has never worked. Nobody has ever won a trade war in history. In 1930 America passed the Smoot–Hawley tariff, which promptly led to the Great Depression. Politicians have done dumb things throughout history. So far, Obama has shown a distinct lack of understanding of what is happening and certainly has continued his anti-capital approach.

Given Obama’s economic policies, are you worried about the future of America?
The hope is that he didn’t mean it, that it was just in the heat of campaigning. Or, even if he meant it, that somebody will pull him aside and say, “Look, Mr Obama, this would be a disaster.” And that he would listen. But who knows? Of course I’m worried. This is one of the reasons that markets kept falling in the build-up to November’s presidential election. Everybody knew Obama was going to win and everybody knew what his policies were.

What does the future hold for the City of London?
The game is up for the City of London. A lot of business, including a lot of derivatives business, some initial public offerings, and some underwriting, migrated there because of Sarbanes–Oxley and other things. But most of that business is now in chaos and has been devastated. The City of London has been particularly error-prone in the derivatives market. I cannot see the City of London making a quick revival.

What role did regulation or the lack of it play in that?
As usual, the people in the business (the entrepreneurs) are way ahead of the regulators. The regulators are usually people who cannot get jobs elsewhere and are basically bureaucrats, and they’re older. In
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Singapore, they have a better approach to that. They pay their cabinet ministers US$1 million a year, which gives them no incentive to be corrupt and ensures that high-quality people are attracted to the job. Everybody, including the regulators, is well paid, which means they’re not easily corruptible.

Could London reinvent itself by pursuing a different strand of business?
Sterling is in serious trouble—what does the United Kingdom have to sell now? The United Kingdom went from being a net exporter of oil to a net importer, that is a gigantic swing in the balance of trade. Thirty or 40 years ago, the United Kingdom went bankrupt and sterling went to parity with the dollar, almost one-toone. But then North Sea oil started flowing and both sterling and the economy had a big revival. Margaret Thatcher took the credit for that. However, basically, any country that opens up the largest oil field in the world is going to have a good time. That’s what rescued the United Kingdom. But now that the country’s oil production is declining, the United Kingdom is soon going to be importing oil again, which will create a gigantic hole in the balance of trade.

What does the future hold for the UK economy?
Over the past 30 years, North Sea oil and the City of London have been pretty much all the extra, new items the United Kingdom has had to sell to the rest of the world. But both have entered a period of rapid decline. It’s a self-reinforcing process. If sterling goes down, it makes people less inclined to do their financial business in London and, as the financial business lessens, there’s less to support sterling, so the whole thing spirals downwards.

More Info
• • • • • Rogers, Jim. Investment Biker: Around the World with Jim Rogers. Chichester, UK: Wiley, 1994. Rogers, Jim. Adventure Capitalist: The Ultimate Investors’ Road Trip. Chichester, UK: Wiley, 2003. Rogers, Jim. Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market. Chichester, UK: Wiley, 2004. Rogers, Jim. A Bull in China: Investing Profitably in the World’s Greatest Market. Chichester, UK: Wiley, 2007. Rogers, Jim. A Gift to my Children: A Father’s Lessons for Life and Investing. Chichester, UK: Wiley, 2009.

See Also
Viewpoints • Viewpoint: Bruce Misamore • Viewpoint: Frank Feather • Viewpoint: Hamish McRae • Viewpoint: Linda Yueh • Viewpoint: Mark Mobius Country Profile • • • China Hong Kong Singapore

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Viewpoint: Jim Rogers

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