Archive for March, 2008

Australia has no sub-prime debt? Think again!

Monday, March 31st, 2008

There is a widespread belief that the sub-prime debt problems in the US is something that can never happen to Australia. The idea that Australian lending is more ‘prudent’ and ‘responsible’ than their US brethren is quite popular. That, along with record low unemployment and the strong resource boom powered by the eternally booming Chinese economy gives the impression that the Australian economy is very strong and that no harm shall befall it forever and ever. Add the mob-pleasing cheerleading ‘research’ by institutions such as BIS Shrapnel (see Another faulty analysis: BIS Shrapnel on house prices) into the mix and we get further incitement into debt overindulgence. Indeed, Australia’s love affair with debt is no different from drug addiction. Eventually, when the drug wears off, painful cold turkey treatment will follow. As we have warned before in Aussie household debt not as bad as it seems?, we will sound our warning again.

Today, we will refer you to a sobering documentary from the ABC- Debtland. This documentary is highly recommended, especially for those who are (1) thinking of ‘investing’ in residential property (see our guide, Are Australian residential properties good investments?), (2) owning huge amounts of debt and (3) thinking of getting deeper into debt. Here, we will quote some important points and add some of our own comments from the transcript of this documentary:

Brian Johnson, a Banking Analyst from JP Morgan said,

The Banks are just handing out money on credit cards like there is no tomorrow. For me it’s quite terrifying to think that the average household in Australia, so the average, now has three months of their monthly disposable income on a credit card balance.

In addition to their burdensome mortgage debts, Australians are taking up even more debts from multiple credit cards, store cards, personal loans, car loans, etc. As Brain Johnson said,

It strikes me that it’s nonsensical, the amount of total debt out there. And no-one seems to know how much debt because a borrower can borrow money across multiple providers of credit.

Thus, each provider of credit does not know the true picture of a borrower’s financial position. While each credit may be sound on its own, how sound will all these combined credit be when concentrated on a borrower? If we do not really know how much debt a person has, how can we really know what the effect of rising interest rates be on that person?

Now, what about those families who are under severe mortgage stress? ABC reporter, asked,

So do you think we’re seeing a situation where people are really under stress on their mortgages and are getting credit cards and basically living off credit on the plastic?

Brian Johnson answered,

There’s no other way that you, there’s no other conclusion you can really draw from the data. And in fact when you speak to the banks about that quantum level of credit card debt there’s a noticeable silence.

Does Australia’s lender practice prudent lending practices? Here are some of the shocking cases…

Kim White, former National Australia Bank (NAB) said,

We would see people come through and we’d estimate how much it cost to lend them all their payments, everything else like that. At the end of the month they’d have $100 left over, but sometimes the system would still say, lend them the money and that person is living on a razor edge.

And you know that they’re not going to be able to afford it. They’re going to live on their credit card for their basic living expenses and get themselves into worse debt. But the system would say do it, the bank would say do it or else you’re going to be under the gun, you’re going to be performance managed out. So we’re in the situation where we lent to whoever we could and as much money as they wanted.

ABC’s Four Corners said

If Kim White wouldn’t rev up the credit limits, someone else would.

In another case, Commonwealth Bank of Australia (CBA) provided credit to a refugee family:

Deng Gatluak and his family fled to Melbourne from war torn Sudan. A refugee with no English, no job, and no concept of finance – yet the Commonwealth Bank gave him a $20,000 car loan. The repayments left this large family with next to nothing to live on.

His wife Nyatut still speaks virtually no English and has no assets, yet she was made the guarantor on the car loan.

Is this just some isolated cases? Good question. As Gary Rothman from Uniting Care said,

If we’re seeing people on low incomes and on Centrelink benefits being lent money that they have no way of repaying, then what are they doing to people who are on even higher incomes and how are they burdening them with debt that they can’t repay?

Good question.

What if an economic recession hits Australia? As we said before in Aussie household debt not as bad as it seems?

A severe downturn to the Australian economy may or may not be statistically likely, but given the level of unprecedented leverage, you can be sure the impact will not be small.

Professor Terry Burke from Swinburne University would agree with us,

What we found was that almost 50 per cent of all households were relying on either overtime or a second job of the main income earner to sustain the mortgage. Now that’s fine so long as the economy is still steaming along at full speed but any slow down in the economy, that’s what will go, the part-time job, the casual payments, overtime, and then you’re in trouble.

In a Sydney suburb of Kellyville,

Out here houses bought for $900,000 a few years ago have sold for not much more than half that. The staggering decline raises questions about the valuations the banks and the buyers relied on.

Brendon Hulcombe, CEO of Herron Todd White said,

The valuer should be able to act without fear or favour but unfortunately we’re getting a lot of pressure from lenders who want to get high valuations to get their deals through.

I don’t know how many are being over-valued but I can tell you that every hour of every day, pressure is put on valuers to write higher figures.

Furthermore, ABC reported that,

Just as banks have become freer with their lending they’ve become looser when it comes to assessing what a property is worth.

Often they don’t even bother to send a valuer through the front door and they’re not always aware of the backdoor deals being done to get the sales though.

As it turns out, valuations are subjected to corruption too as Matt Ganter, a valuer from Herron Todd White said,

There’s a bit of an issue out here where developers rebate to the tune of up to around about 15,000 on a block for 160,000, which brings the true value of what people are paying down to the 145,000 mark.

[Banks are getting false valuation] if they’re relying on the automated valuation models and there’s rebates involved, absolutely.

Now, in addition to mortgage loans and credit card, there are other kinds of loans including margin lending for shares, store cards, and so on. One of them, GE Money was singled out for irresponsible lending with exorbitant with high interest rates.

We wonder how much sub-prime debt does Australia have.

Another faulty analysis: BIS Shrapnel on house prices

Sunday, March 30th, 2008

As reported in this news media article, BIS Shrapnel just released an report,

Australia’s housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.

Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.

This is an example of misinformation and ‘analysis’ by those who should know better.

Firstly, this is an example of turkey thinking (see Example of a financial turkey: Australian Property Monitors), as the article said:

The figures quoted by Mr Gelber are largely in line with Australian Bureau of Statistics (ABS) data.

Calculations, based on the ABS established house price index, show that during the 10 years to December 2007, house prices rose an average of 9.9 per cent a year. The index rose 12.3 per cent in 2007.

In the 10 years before that, house prices rose an average six per cent a year.

In the past 20 years they have risen an average 7.9 per cent a year.

The journalist who wrote that article was implying that since property prices had been rising so many percent over the past so many years, therefore what happened in the past is consistent to what will happen in the future as ‘predicted’ by BIS Shrapnel. Turkey thinking is the primary reason why the majority is always wrong (see our guide Why are the majority so wrong at the same time and in the same ways?).

Secondly, this type of analysis is too simplistic. Basically, it is simplistically saying that since demand is greater than supply, then prices will rise. It looks to us that BIS Shrapnel is looking at the Australian property market as a monolithic whole. In reality, as we said before in Myths on the Australian housing/rental crisis & its implications, the problem is not really simplistically due to outright shortage. Rather, the real problem is the mismatch between demand and supply. In Sydney alone, there are some areas suffering from over-demand and others suffering from over-supply. Blindly increasing the supply alone will not solve the problem.

Can Australia’s already excessive debt levels increase further to feed further property price boom? This is another flaw in BIS Shrapnel’s analysis. The only way for house price to rise further is for debt levels to increase. If Australia’s high levels of debts are already strangling the average Australians with excessive debt stress (e.g. mortgage debts) at a time of record low unemployment, how can debt levels increase any further to feed the further substantial increase in house prices? As the business cycle turns, unemployment will increase, which will result in de-leveraging of the highly leveraged households. The higher the leverage, the more painful the de-leveraging will be. The more painful de-leveraging is, the greater pressure will be on asset prices (see What can tip Australia into a downward property price spiral?).

Where is the housing ‘demand’ going to come from as credit becomes more expensive? The only way for most people to buy a property is to borrow money. If credit becomes more expensive (i.e. harder to borrow money), obviously the ‘demand’ for properties will fall as well. As we said before in Rising price of money through the demise of ?shadow? banking system, the global financial system is undergoing a credit crunch whereby money is getting more and more expensive. Along with that, the ‘demand’ for houses will slowly disappear as well.

BIS Shrapnel had also shown itself to be economically challenged. As the article said,

Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property.

This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion.

If it ever comes a day when the Reserve Bank of Australia (RBA) has to cut interest rates, it will be a day when the Australian economy is in deep trouble, when debt deflation grips the nation. That will NOT be good for property prices. In fact, this is currently happening in the US right now when money-printer Ben Bernanke (see Peering into the soul of Ben Bernanke) is busy trying to fight asset price deflation (see Recipe for hyperinflation).

We are astounded that even a leading industry research organisation can produce such nonsense.

Why are fantastic stocks sold off in a bear market?

Friday, March 28th, 2008

We are now officially in a bear market for stocks. As of yesterday, the Australian All Ordinaries Index had fallen 21% from its 1 November 2007 high. At its lowest point in 18 March 2008, the index was down by 25%. Right now, the All Ordinaries Index is even lower than what it was 12 months ago. Not only that, the market is getting more volatile, with stock prices falling very rapidly (e.g. the infamous Black Tuesday happened in January 2008 when the Australian market fell by 7% in one day). For investors, there seem to be no place to hide in the market as it seems that almost every stocks are affected.

Contrarians such as value investors would love such a bear market because it is a great time for bargain hunting for good quality stocks. For this reason, they are often inaccurately misunderstood as ‘bullish’ as they get excited and greedy when the market as a whole is getting fearful. But this leads to another question. In a bear market, especially during times of panic selling, why would stocks of good quality businesses fall along with the bad ones? If good quality stocks are really that good, why would they fall in the first place?

The most common cited general answer to this question is that in a panic, animal spirits of fear takes over and the market as a whole becomes irrational. In other words, it is negative sentiment that drives such absurdity.

But we are not satisfied with this answer, for it sounds like a cliché to us. So, for those who are as dissatisfied as us, we will provide one of the many pragmatic reasons for such absurdity. One word sums up this reason: leverage. Today, there are so much leverage in the financial system and by extension, the market. Both retail and institutional market participants borrow and employ leveraged derivates (e.g. options, CFDs, futures, etc). The problem with leverage is that, when the market goes against you, your losses are magnified and you find that you are suddenly short of cash (to repay the debts, obligation, margin calls, collateral, etc). Sometimes, the only way to increase your cash level is to liquidate whatever you have- the good investments along with the bad. If enough people are in the same situation as you, this will result in widespread indiscriminate selling in the market.

Thus, weak hands’ forced liquidation due to de-leveraging results in indiscriminate selling. For those who are in a strong cash position, this can be an opportunity to exploit.

What can derail the China growth story?

Wednesday, March 26th, 2008

Recently, news of fuel shortages in China has been hitting the news wire again- see China Facing Renewed Fuel Shortages from the Associated Press. In fact, this problem had been festering since last year November, when we wrote Result of Chinese price controls.

If this fuel shortage problem continues to worsen in the months ahead, will it eventually result in a major correction in the Chinese economy? As we put forth this question before in Can China really ?de-couple? from a US recession?,

Does China have enough capital goods, labour (yes, there are reports of labour shortages in China) and raw materials to continue the current trajectory of capital investment growth in China?

With such high oil prices and rampaging inflation in China, this is a worry that cannot be ignored. Keep watch on the Chinese fuel situation.

Price fluctuations and hoarding

Tuesday, March 25th, 2008

Continuing from yesterday, we observed the recent volatile movement of commodity prices. In today’s lightening speed of Internet trading at the click of a mouse button, how much do these price movements reflect changes in underlying demand and supply? This is the issue that we brought out in Analysing recent falls in oil prices?real vs investment demand,

What makes up the demand for oil? There are basically two types of demand for oil: (1) The physical demand where the real side of the economy uses for its everyday needs and (2) The investment demand where the financial side of the economy shifts the money here and there from one asset class to the other. We need to ask ourselves the following question: Has the physical demand for oil changed?

In today’s context, does a sudden fall in the price of a commodity (e.g. oil, iron, grain, wheat) mean that its underlying demand has suddenly fallen or its supply has suddenly increased? Obviously, the answer is no.

Over the years, through the developments of financial ‘innovation,’ commodities have become the playground of hedge funds and other money shufflers. So much so that we had to categorise demand into basic underlying demand and ‘investment’ demand. As we think about this issue more and more, how can commodities really be ‘investments’ in the first place? As we said before in Is gold an investment?,

But in reality, since gold is a boring, inert metal that does not have much pragmatic use and does not pay dividends, income or interests, it is completely unfit for ?investment.?

In the same way, commodities are tangible things valued for their pragmatic use. But they do not pay dividends, income or interests too. So, how can they be ‘investments’ and therefore, have ‘investment’ demand associated with them?

Today, we had thought of a better way to describe those ‘investment’ demand- hoarding. In essence, those hedge funds and money shufflers who ‘invest’ in commodities are hoarding. They hoard commodities in anticipation of increased demand in the future. As their anticipation changes, they hoard and dis-hoard accordingly, resulting in irrational price movements. Worse still, some of them borrowed money to hoard, thus accentuating the violence of price changes. With central bankers like Ben Bernanke increasing the floodgates of more easy credit (see Marc Faber: Bernanke Policy Will ?Destroy? U.S. Dollar), no wonder much of these borrowed money goes into hoarding in anticipation of higher prices.

All these hoarding activities distort price signals, which can even confuse the experts on the state of real underlying demand and supply. As long-term investors, do not let the hoarders confuse you.

Confidence back? Beware of bear market rally

Monday, March 24th, 2008

Last week, gold prices fell from a high of around US$1020 to around US$910 at the time of writing. Oil prices fell from a high of around $US110 to around US$100. Commodities from copper, zinc, nickel, wheat to corn also fell suddenly. The US dollar then rallied.

What is going on? Is inflation suddenly being suppressed and confidence in fiat money (chief among them is the US dollar) revived? The financial media even joined in the cheer-leading, as we see this nonsensical article from Bloomberg: Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke– it said,

The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.

Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks.

So, this article is saying that in the span of less than a week, confidence is being revived and returned into the global financial system? Is it implying that ‘investors’ are suddenly seeing the light at the end of the tunnel and raised cash to buy stocks in anticipation of the glorious economic recovery that Bernanke is going to orchestrate? Indeed, this article should be put into the humour section.

One common explanation of such a sudden fall in commodity prices is that ‘investors’ have to liquidate their winning trades (e.g. gold, oil) to fulfil the margin call of their losing trades (e.g. stocks). Another way to look at this is that this is an example of deflation. Anyway, whatever the reason, we are hardly surprised by such developments. Our loyal readers should not be surprised too because we have warned about it even as early as 12 months ago (see Inflation or deflation first? and Warning: gold price can still fall significantly).

Anyway, do not be fooled, dear readers. This is a great example of a bear market rally. Such rallies are very common- even in the Great Crash of 1929, the stock market rallied for 6 months in 1930 before falling to its lowest point in 1932 (see Second lesson of ?29 crash?bear rebound).

In the next article, we will explain why such kind of price fluctuations happens, which should not perturb the long term investor. Keep tuned!

Example of a secular trend- commodities and the upcoming rise of a potential superpower

Wednesday, March 19th, 2008

In the 19th century, Great Britain was the superpower of the day. She was an empire with colonies, commercial interests and trading posts all over the world. Her navy was unrivalled, patrolling the world’s seas. Her currency, the Pound Sterling, was much of the world’s primary reserve currency during the 18th and 19th century.

The 20th century saw the secular decline of the British Empire. Two world wars and economic weakness resulted in the Pound Sterling losing the reserve currency status. At the same time, the 20th century saw the secular rise of the United States into an arguably, empire.

It has been said that today’s 21st century will see the secular rise of China. During the 20th century, China endured non-stop revolutions, civil wars, invasions, social upheavals, ideological experiments (e.g. Cultural Revolution, Great Leap Forward). It was the last couple of decades of the 20th century that China began to slowly emerge from her self-imposed shackles to catch up with the West. Napoleon once said that China is a sleeping giant that will shake the world when awaken. Today, despite the breakneck growth of the Chinese economy, China still have a lot of catching up to do in order to attain the same level of affluence, standard of living as the West- there are still hundreds of millions of peasants in China that is still relatively poor by Western standards.

Now, take a look at the United States today. With only a few hundred million people, the US consumes more oil than any other country in the world. China, with four times the population of the US, still does not consume as much natural resources as the US. What if China is to attain the same level of affluence and standard of living as the US? Imagine the amount of natural resources that will be consumed! We are not even sure whether the earth has enough resources to accommodate a nation that is equivalent to four United States in terms of population.

At this point, we still have not yet included Russia, Eastern Europe and India into the picture. Assuming that all these nations are to rise towards the level of the West as China is doing right now, imagine the strain their demands will be imposed on Mother Earth!

It has been said that demand for commodities follow a cyclical pattern. During recessions, the demand for commodities decline and during booms, demand rises. For example, copper is nicknamed the metal with ‘PhD in economics.’ The demand for copper is said to follow the business cycle.

Then there are people like Jimmy Rogers who believe that commodities are now in a upward super-cycle. Of course, there are sceptics to this super-cycle theory because of their underlying conviction that commodity demand still follows a cyclical trend. But what is the underlying belief of the commodity super-cycle theory?

Armed with the understanding from our previous article, Understanding secular vs cyclical, you can see that the rise of China (and India, Russia, etc) that we just described is a secular trend. Thus, the demand for commodities that supports this secular trend must also follow a secular trend too.

But does that automatically mean that commodity prices will go up and up for ever and ever for a very long period of time? From the short-term bubble in metal prices in 2006, it is obvious that there are many speculators who misapplied the commodity super-cycle theory to the extreme. For example, copper prices climbed so rapidly in the short-term that by mid-2006, after having risen in a parabolic path, its prices suffered a major correction.

Now, cast your eyes back to the 1930s in the US. With hindsight, we can easily see that the Great Depression was a traumatic setback in the secular rise of the US in the 20th century. But in the end, the US survived and went on to become a world superpower. The same goes for China. Although we believe China may be facing a major correction down the years (see Can China really ?de-couple? from a US recession?), it does not necessarily mean that her secular rise in the 21st century will come to an end, unless something really drastic happens to plunge China back into the dark ages of the 20th century. As such, her demand commodities will always rise in the long run. The best phrase that explains this point is from our previous article, Understanding secular vs cyclical:

 Sometimes, within a larger secular trend, there are cyclical sub-trends.

As long-term investors, we should not lose sight of this big picture. Sure, commodity prices can even correct 50% in the short to medium term, but do not let the cyclical sub-trends cloud your understanding of the underlying secular trend.

Understanding secular vs cyclical

Tuesday, March 18th, 2008

One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends. Confusion between the two can result in lost profits or worse still, losses. Before we can give examples of secular and cyclical trends, let us begin with definitions from the Encarta® World English Dictionary:

Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

All of us understand the concept of cyclical trends. The four seasons is a fine example- winter comes and goes and it will come back again. For the economy, booms are followed by busts, which are followed by booms again.

Secular trends, by definition, are far less common. An example of a secular trend is the falling trend of film photography. With the advent of digital photography, the usage of film in photography is in terminal decline- it will never rise again and film photography will eventually be consigned to history.

Now, let us introduce more complications into the picture:

  1. Sometimes, within a larger secular trend, there are cyclical sub-trends. For example, due to inflation, house prices will rise in the very long run, keeping place with inflation. But in the short to medium term, there are periods of price inflation and deflation.
  2. The converse is also true- within a cyclical trend, there may be secular sub-trends. For example, when you look at the history of the Chinese civilisation, you will see repeated cycles of dynasties- birth of a dynasty, growth, decay, fall and then birth of a new dynasty again. But within a dynasty, you will find trends that last more than a person’s lifetime, which is secular as far as that person is concerned.
  3. Sometimes, a secular trend is really a secular trend. For example, the decline and ultimate fall of the Roman Empire happened once in history and will not be repeated again.
  4. Sometimes, a cyclical trend is really cyclical. The four seasons is the best example.

How is all these abstract philosophy relevant to an investor?

Well, it is one thing to understand the difference between the two in our heads and another thing to act accordingly. For example, after more than 15 years of non-stop expansion in the Australian economy, there are many people, who through their investment decisions, believe that the business cycle is finally abolished. That explains: Why are the majority so wrong at the same time and in the same ways? To have a good perception of the nature of trends, we have to understand and look at the big picture and have a grasp of time frames that can go beyond our memory and even life-time.

So, in the coming articles, we will apply this understanding in the context of real-life investment decisions.

Chinese revenge on Rio/BHP

Tuesday, March 18th, 2008

In What is Chinalco?s role in the mining love triangle?, we said that

Traditionally, the annual price for iron ore is determined by chivalrous negotiation between the producers (e.g. BHP, Rio, CVRD) and customers (Chinese, Japanese and Korean steel mills). Last year, BHP had been toying and pushing with the idea of turning iron ore price determination towards the more conventional free market model. Of course, that angered China as it is in their interest to contain iron ore prices. We guess the Chinese must still be smarting from BHP?s attempted spat. The recent move by Chinalco could just be the first round of a payback.

… They will be careful not to turn this into a political drama. That explains why they are, up till now, taking the softly softly approach.

It will be interesting to watch what the Chinese will do for their next step.

Guess what the next step of the Chinese is? They blacklisted Rio and BHP in their own daily spot market. See this news article: China locks out BHP and Rio ore.

Jimmy Rogers: ‘Abolish the Fed’

Sunday, March 16th, 2008

Recently, one of our readers, alerted us to a video interview of Jimmy Rogers at CNBC. He was the contrarian who was famously right on the commodity bull market several years ago. That interview was conducted a few days ago, after the 400+ point rise in the Dow Jones after the Fed announced a US$200 billion liquidity injection and for the first time, lend Treasury bonds in exchange for mortgage bonds. Both Jimmy Rogers and Marc Faber (see Marc Faber: Bernanke Policy Will ?Destroy? U.S. Dollar) are contrarians who are influenced by the Austrian School of economic thought. However, both of them differ in style. Marc Faber is more of the intellectual/philosopher style whereas Jimmy Rogers is more of the straight-talking street-smart style.

Jimmy Rogers’ first reaction to the 400+ point rise was,

You see what it did to the stock market. You see what it did to your friends at Wall Street. But it is not good for America. It is not good for the 300 million Americans. It is not good for the world. This man Bernanke goes from bad to worse.

Jimmy Rogers was asked, why was a 400+ point rise not good for American? Basically, the reason was because of the huge amount of money being injected into the financial system, which will eventually result in inflation, depreciating dollar and ultimately cause a worse recession. We agree with Jimmy Rogers, as we said before in November 2006 at How will asset-driven ?growth? eventually harm the economy?,

Indeed, as we mentioned in our previous article, The Bubble Economy, this is exactly what the Federal Reserve is currently doing to the US economy. In 2001, when the US economy was faced with a threat of recession, the Federal Reserve embarked on an expansionary monetary policy (aka ?printing money?) in an attempt to prevent it from happening. We believe this policy does not prevent a recession?it merely postpones it, in which the upcoming one will be more severe instead.

Even if Bernanke succeeded in ‘preventing’ a recession by re-inflating the economy with another bubble, it will set the stage for an even bigger recession in the future.

As Jimmy Rogers said, by collecting mortgage bonds in exchange for Treasury bonds, the Fed is getting involved in a “landlord business,” by collecting ‘rents.’ Are they going to get involved in a car loan and credit card business next? What the Fed did was akin to ‘printing’ money, which was what they did in the 1970s. Then Paul Volcker came to crush inflation with crippling high interest rates (see Peering into the soul of Ben Bernanke for a mention of Paul Volcker).

Jimmy Rogers is still bullish on the commodities, no matter what happen to the dollar. With the monetary printing press running at full speed, it will exacerbate the commodity price inflation even more. Jimmy Rogers reckoned that Japan made the same mistake (by cutting interest rates to zero) and “18 years later, they are still trying to solve the problem.” As pointed out by one of the interviewers, the Fed did not technically ‘print’ money by lending Treasuries in exchange for mortgage bonds.

So, Jimmy Rogers was asked, what will he do if he is in Bernanke’s shoe?

I would abolish the Federal Reserve and resign.

That provoked some laughter. He was asked, how would that help the 300 million Americans?

We wouldn’t have anybody printing money. We don’t have inflation in the land. We don’t have a collapsing US dollar. We will start to have a sound currency again. And we start to get rid of inflation. Inflation is not good for the world. No country in the world has succeeded by debasing its currency. That’s what this man is trying to do. He is trying to debase the currency as a way to revive America. It has never worked in the long term.

However, Jimmy Rogers was asked for a “real solution” to solve the current problem. His response was this:

What is so wrong about a recession? It can cost you more to prevent a recession than have a recession… Recessions are good. They clean out the excesses and [we] start out from a sound foundation and then you go again. It is like a forest fire… nature invented forest fires to clean out the undergrowth so that the forest can then revive and grow from a sounder foundation.

We agree with Jimmy Rogers on this (see What causes economic booms and busts?).

Regardless of a recession, how can an investor make money out of this market? Jimmy Rogers’ recommendation is to “buy agriculture” where investors are going to profit in 2, 3 or 5 years. By “agriculture,” he meant agricultural commodities like cotton, wheat, sugar and so on. He specifically favoured commodities themselves more than stocks of commodity producing businesses. The Chinese Yuan, Japanese Yen and Swiss Franc are his favourite currencies. Shorting investment bank is another possibility.

But wouldn’t shorting investment banks deepen the rot in the financial system?

Jimmy Roger’s reply is:

Wait a minute! Why is it the end of the world if an investment bank goes bankrupt? … If you bail out every investment banks, that is not capitalism- that is socialism for the rich. Why should two or three hundred million Americans suffer so that we can bail out two or three investment banks?

What about more or better regulations on the investment banks?

More regulations? You want Alan Greenspan and Ben Bernanke? These are the guys who got us into this situation. They are supposed to be regulating the banking system for the past 50 years. These are the guys who let it all happen. I don’t want more regulations. Let the market regulate it. If xyz needs to go bankrupt, let them go bankrupt. I promise you, that will send a very straight signal and you will have a lot of self-regulation when these guys start to go bankrupt.

Regulations will not solve the problem. Instead, it will introduce more problems.

When it comes to China, what about their inflation problems? To Jimmy Rogers, at least the Chinese government is more honest about their inflation problem. The American government, on the other hand, is denying that they have an inflation problem. Thus, the EU, Chinese, Norwegian and Australian central banks are doing a better job. Ben Bernanke, on the other hand, is “pouring gasoline into the fire.”

At this point, the interview was cut off.