What in the world is going on?

June 1, 2004
WHAT would you do if, by the time you reached age 37, you already had earned more money than you used to think existed in the entire world? If you were

WHAT would you do if, by the time you reached age 37, you already had earned more money than you used to think existed in the entire world?

If you were Jim Rogers, you would retire from your job managing mutual funds on Wall Street, travel around the world on a motorcycle for two years, get married, take a three-year trip in a Mercedes convertible, then offer your global economic insights on national business television.

Jim Rogers learns quickly. A graduate of Yale University, he also has degrees in philosophy, politics, and economics from Oxford University. But his multi-year trips have provided a different type of education. He learned to eat what the natives eat (some worms are quite good, actually) and slept in five-roach hotels when five-star hotels were not available.

His lengthy, up-close visits to most of the world's countries have given him a perspective about the world's economic future that your average, run-of-the-mill multi-millionaire economist does not share.

He shared those views at the Truck Trailer Manufacturers Association Convention.

“Let me tell you some of the things that are going on in the world that will affect us as citizens, manufacturers, and investors,” he said. “The first thing we have to understand is the rise of China. China is the next great country in the world. The Chinese call themselves communists, but they are capitalists. They save or invest 35% of their income. We in America save 2%. They are on the rise whether we like it or not. There's not much we can do about it — there are 1.3 billion of them, and their country has unleashed entrepreneurship and capitalism.

Rogers compared China to where America was 100 years ago.

“If we stood here in 1904, we would have said that America was going to be the great country of the world of the 20th century,” he said. “The best advice I can give you is to make sure your children and grandchildren learn Chinese. It will be the most important language in their lifetime other than English.”

Dialing down dollars

Another important trend around the world involves the future role of the U S dollar.

“For the past 60 years, the U S dollar has been the world's medium of exchange,” Rogers said. “This is in the process of changing, and this will have dramatic effects on us as citizens and as a nation.

“The U S now owes the rest of the world $8 trillion. Our foreign debts are rising at a rate of $1 trillion every 20 months. Many people in the world are beginning to say that they do not want to take dollars anymore.”

This should help the U S government achieve its stated objective of driving down the value of the dollar.

“This is not a good policy,” Rogers said. “This is a terrible policy. It has never worked for the long-term benefit of a country. Yet the Federal Reserve has said it will print money 24 hours a day if necessary and drop money from airplanes if that is what is required to drive the dollar down.

“That will present opportunities. For some of you, those opportunities will be good. For some, they will be terrible. It depends on how you react. Those who will be killed will be the ones who don't know what is going on, and I want you to be aware.

Rogers said his 10-month-old daughter has a bank account, but it is in Europe — not America.

“She will have to take care of me someday,” he said. “She will know what is being done to the dollar.”

Where to invest

The investment strategy of buying stocks and holding them is no longer the way to invest, Rogers said.

“In the 1980s and 1990s, the United States had a huge bull market in stocks. All you had to do was buy them and hold them, and you made a lot of money,” he said. “That will not be the case in the next two decades. If you are good at buying low and selling high, you will be okay. But the days of getting rich buying and holding shares are no longer here, and they won't be for the next 10 years.”

The investment environment today is similar to that of the 1970s, he said.

“During the 1980s and 1990s, we had a huge bear market in commodities, raw materials, and natural resources,” Rogers said. “That has changed, too. We now have a bull market in commodities, one that will continue for the next 10-15 years. If you haven't realized that, start figuring it out and start adjusting.

“We now are at a point where commodity prices offer opportunities for investors. This may sound radical to some, but we had a bull market in commodities during the 1970s at a time when the world's economies were not doing well. Supply and demand are out of whack. When that happens, you either have a bull market or a bear market in commodities. We are now in a bull market as we were in the 1970s. Economies may go up or down around the world, but commodities are going to go higher.”

Rogers cautioned that none of these investment options last forever, and none go straight up. He predicted setbacks along the way, as well as rallies. Despite the downward pressure, for example, he expects a rally in the U S dollar. And despite the rosy future for the world's most populous country, China will experience setbacks — including this year or next because of economic turmoil.

“But if you see ‘Trouble in China’ on the cover of Time, get as involved in China as you can. Buy Chinese shares or move manufacturing there,” Rogers said. Because the trouble will not last long, he believes.

“The world is always changing, it always has, and it always will, Rogers said. “No matter what decade you were in, things were different at the beginning than they were at the end.”

Question: What do you think the value of the dollar will be relative to the euro next year?

Rogers: I own the euro. The world is looking for a currency to compete with the dollar. However, it is not an economic currency — it is a political currency. Political currencies usually do not work long term. I do not expect the euro to exist 15 years from now, but I own it at the moment. Where will it be a year from now? I expect the dollar to go up and then go back down this year. By the spring of 2005, I expect the euro will be higher. I wish I were smart enough to tell you how much.

Question: The Muslims seem to be anti-American. What makes them feel this way?

Rogers: Some Muslims do, but there are over a billion Muslims in the world. According to a poll conducted during the summer of 2002, the single most popular country in the world for Muslims ages 15-25 was the United States. As we traveled around the world, we found some who were very angry. But as far as the Muslim world is concerned, we were the most popular country in the world. I am not sure we are now that we are in Iraq. Muslims continue to love America, and they come here as much as they can. But when things go wrong, religion can be an effective rallying cry.

Question: How did you communicate in all these different countries?

Rogers: English is still the most widely spoken language in the world. If you can speak French and English, that will get you through most of Europe and Africa. English is spoken in much of India, Bangladesh, Pakistan, Australia, and New Zealand. I picked up some Spanish during my first trip, which got me through Latin America. When you are in a country a long time, you learn the important words. I can say “cold beer” in 40 languages.

We are very good at sign language, and we had language dictionaries. But it was amazing how often the local high school English teacher came to practice his English when he heard we were in town. Even if you only speak English, you can make it if you are adventuresome and can figure things out.

Question: China has been growing very fast for the past few years. Can you guess what kind of economic setbacks it might face?

Rogers: China has an overheated economy right now. The government is attempting to cut back the economic growth, and I believe they will be successful. But remember, the Chinese government is no smarter than any other. Most governments don't get these things right. In the 1980s, the Chinese government had to cut back an overheated economy, and things got out of control. That led to Tienneman Square. In the mid-1990s, things got out of control again, and they had to cut back. They are cutting back again now, and I am afraid things will get out of control again. We could see a slowdown in the economy, a recession, or political turmoil. Don't be surprised to see turmoil in China this fall or next spring.

All of this will be a temporary setback. Remember that the United States, on its way to becoming the greatest economy in the world, had 15 depressions — not just recessions. We had a horrible civil war that tore the country apart.

As recently as the end of the 19th century, there were not a lot of people with a lot of human rights. In 1907, the entire country went broke. We, too, have had our setbacks, but we have done a pretty good job.

Question: If you were buying a new trailer, would you use a floating rate or a fixed rate? Would you lease it, or would you purchase it with conventional financing?

Rogers: There is no question in my mind that interest rates will be going higher, but they may not go much higher until after the election or next year. Whatever you buy, do it with a fixed rate loan or mortgage. The only exception would be a loan of less than two years. An adjustable rate may be advantageous if the term is very short.

I have never leased a trailer. But finding the best deal is simple math. Part of the equation, though, will be interest rates. Assume interest rates will go higher — a lot higher — over the next five years.

Question: What are your thoughts about manufacturing in the United States over the next 10-15 years, compared with the low-cost alternatives around the world?

Rogers: If you can find good, efficient alternatives, there is nothing wrong with that — that has been the history of the world. The United States took a lot of business away from a lot of people over the last century.

But things are not that simple. A lot of companies are trying to do business in Mexico and other parts of the world, but have found that doing so is not that efficient. They are discovering that it is still cheaper to manufacture here.

One reason the government is trying to drive down the value of the dollar is to make it easier to manufacture things here. That will happen, at least in the short-term. But remember that as the value of the dollar goes down, the cost of other things is going to rise.

Even so, the trend to manufacture more things overseas is not going to stop. We have a very high tax rate. We have a lot of regulations and litigation, a very expensive health care system. I wish these things were not going on, but they are, and I don't see anyone being able to stop them.

Question: What should the government's position be on outsourcing?

Rogers: Studies have shown that more jobs are outsourced to the United States than leave. This fact is more or less ignored by politicians who want to make an issue of outsourcing. Yes, some jobs will move to India or elsewhere, but that should be a maximum of 100,000 jobs. But if you try to do business in India, you will find that it is not very easy. The Indians are against capitalists and foreigners. But it will continue to happen, just as jobs will continue to be outsourced to the United States.

What should the U S do? We have a horrible tax system in this country. We save only 2% of our income partially because of our tax system. We discourage people to invest, and you cannot have a vibrant economy without a lot of investment. In this country, if you have a job, you pay taxes. If you put the money in the bank, you pay taxes again. If you buy a stock and receive a dividend, you pay taxes again. If you receive Social Security, you pay taxes again. God forbid if you die, because if you have an estate, they tax you again.

Countries that are more competitive do not tax that savings and investment — they tax consumption. We in American have a tremendous consumption vent. We all love to consume as much as we can, and we max out our credit cards. And the government owes far more than that, because we are a consuming society.

And someone has to litigate all of our problems. That does not happen in other countries. Japan, Germany, and China do not have many lawyers.

Our education system is broken. We spend more money than any country in the world, but our test scores rank 22nd. When American kids are tested, they do not come out on top — in spite of all the money we are spending.

Medical care. We spend more money than anyone — 15% of our gross national product. Yet we don't have the world's longest life expectancy by a long shot.

For all of these problems, the government is throwing money out the window. And when that happens, it raises your cost of doing business. We can change a lot of things, but are we going to do it? No, not without a crisis.

Question: How were you surprised by the countries you visited?

Rogers: When I first drove my motorcycle across China in 1986, sometimes there were no roads. China now has the best highways in the world. They have learned from the Americans, Japanese, and Germans — and they are working to make it even better.

In India, I expected to come back bullish. I came away thinking that India basically is a scam as a place to do business.

I thought I would come back from Mexico bullish, but Mexico has serious problems. This is a country that gets 40% of its income from oil, but they have not found any oil in a long time. Their reserves are down 15% over the last 15 years, and Mexican oil production soon will begin to drop dramatically. That will cause problems, because the government has no other place to get revenue, and it has the youngest population.

Another surprising fact was the shortage of women in Asia. In Korea, there are 120 14-year-old boys for every 100 14-year-old girls. In parts of India, they cannot find wives. When these girls grow up, they will realize they can get anything they want. This will change education, economics, society, everything.

Question: If you had a 30-year, income-producing pension plan, where would you invest other than commodities?

Rogers: If you wanted to invest only in U S dollars, I would keep it in short-term treasury bills for the most part. I also would buy foreign government bonds — short term. You can buy them through your broker. If your broker can't get them, get another broker, because it is not that complicated. Unless you are very good in stocks or you have a very good mutual fund manager, be careful. There are 10,000 mutual funds in the United States today. We can't possibly have that many smart 29-year-old fund managers.