Barron's on Jim Rogers

Barron's is really catching on to this whole commodity thing. Last week it was a dismissal of the commodity bubble thesis and an interview with Goldmoney.com founder James Turk. Gracing this week's cover($) we find commodity investor extraordinaire Jim Rogers.

Lately, this publication has become the preferred weekend reading material here, despite the fact that they have never fulfilled their promise of a complimentary print subscription - an attempt to compensate angered subscribers some time ago when they redid their online subscription plans.

A reader posted a comment on last week's Barron's post indicating that you have to call them to get the print subscription activated. Oh well, one more thing to add to the To Do list.

Aside from the little subscription quibble, the only complaint with recent issues of this publication is the title applied to this week's Jim Rogers story - Last Laugh. It seems a bit inappropriate, implying a sort of finality to the current happenings in commodity markets, in conflict with the substance of the interview and other views expressed in the pages of Barron's recently.

WITH THE PRICES OF OIL AND INDUSTRIAL METALS like copper, zinc and nickel screaming higher in recent months, such observers as Warren Buffett and Morgan Stanley's Steve Roach have proclaimed that commodity markets are in a bubble destined to burst soon.

But Jim Rogers, fabled hedge-fund manager of the 'Seventies and now ardent commodity bull, finds such talk ridiculous. Indeed, he has been pounding the drum for investing in commodities in recent years in numerous speeches and media interviews, even writing Hot Commodities, a book propitiously published in late 2004 that predicted a coming price boom in everything from aluminum to zinc.

Barron's caught up with Rogers on a recent rainy morning as he worked out on a stationary bike in the fourth-floor exercise room of his five-floor mansion on New York's Upper West Side. Bloomberg Radio droned in the background as he talked while occasionally glancing at a laptop computer, perched precariously on the machine's handlebars. "How can anybody say that a bubble has developed in commodities yet" -- brief pant -- "with sugar 80% below, silver 75% below and corn and cotton less than half their all-time price highs?" he huffed. "You can't have a bubble when the media has only begun to pay attention to commodities in recent months after years of disinterest. We're now only in the early part of a long-term commodity price boom that has years to run and will likely see literally dozens of raw- material prices make new highs. Even crude oil and copper have a long way to go, even though they recently set price records."

How long will the surge run? Based on the past longevity of commodity bull markets (Rogers mentions ones that, by his reckoning, lasted from 1906 to 1922, 1933 to 1953 and 1968 to 1982), the current boom could last eight to 14 more years. The commodities-bubble crowd scoffs at that, just as skeptics did when Rogers predicted the current boom a few years ago.

Living in Southern California suburban sprawl it's hard to imagine exactly what a five floor mansion on the Upper West Side of New York might be like, but it sure does explain the deferential comments that are made by every other guest on Cavuto on Business.

As to the "Last Laugh" title, based on what appears in the beginning of this story, a more appropriate phrase might be something along the lines of "Not the Last Laugh, but a Big Smile".

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References to studies about how commodities have outperformed equities keep popping up in Barron's. Last week it was an Ibottson study, this week Barry Bannister of Stifel Nicolaus, Gary Gorton of the University of Pennsylvania, and K. Geert Rouwenhorst of Yale all chime in with the same idea.

Alert reader John Law (not his real name) has provided this link(.pdf) to the Yale study.

It all seemed so obvious to a select few people around the turn of the century, and seems obvious to more people today, but the idea of equities as second fiddle to boring commodities is anathema to the vast majority of those with money to invest.

To Rogers, the past few years have witnessed another changing of the guard; commodities will rule over stocks and bonds for the next decade or more. Inflation will continue to flare and not just because of rising raw-material prices. According to Rogers, new Fed Chairman Ben Bernanke is "an amateur with no knowledge of markets" whose academic work revolved around how nations could avoid depressions by printing more money. And, finally, he throws into this witches' brew the likelihood of a collapse in the dollar as a result of America's accelerating debtor status. Rogers views commodities as the ultimate refuge from these scourges.

That's a stinging criticism of the new Fed Chairman and a cogent summary of his writing on both the Great Depression and the "lost decade" in Japan. Even if you don't agree with him, or if you think that he's just talking his book (in this case, both the Rogers Raw Material Fund and his book Hot Commodities), it's refreshing to hear someone speak this bluntly about monetary policy.

He was no fan of Alan Greenspan, and may think even less of Ben Bernanke.

Rogers has been bullish on all things Chinese for many years now, and rightly figures that despite many bumps along the way, the emerging Chinese middle class will eventually drive global consumption, exposing the underinvestment in infrastructure and exploration during the last two decades for what it was - a poorly timed cost saving measure.

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.

From a recent documentary, the image of a young Chinese couple living in what looked like a 400 square foot apartment going to the local automobile dealer to purchase their very first car will forever remain fresh in my mind. Give these eager young workers credit cards and then, later on, wacky home loans, and we'll soon find that China doesn't need the U.S. or our dollars to sustain their manufacturing output.

Citibank is working on that.

As to the recent investor interest in commodity funds and the theory put forth elsewhere by certain quacks in the financial media that the new commodity ETFs are driving prices ever higher, someone who might know a little something about commodities weighs in.

In all, some $90 billion in institutional and individual investor money has poured into various commodity index products with the Goldman Sachs index boasting around $60 billion of the total. Hot performance has been part of the lure, to be sure. In addition, the commodity markets have become infinitely more respectable as a result of academic studies, such as the earlier-mentioned Gorton-Rouwenhorst paper, asserting that fully collateralized futures positions shield investors against inflation while offering stock-like total returns over the long haul, though timed to different stages in the economic cycle.

Some observers contend that the advent of commodity index funds, along with the addition of exchange-traded funds based on a single commodity, such as gold or silver, artificially pumped up prices through collective buying. The ETFs purchase physical commodities as money pours in, while the index funds concentrate on futures that are near expiration. The latter activity also boosts "spot" or cash price of commodities, some maintain.

ROGERS FINDS SUCH contentions preposterous. First, he argues, the commodity index funds are minuscule, compared with the index funds that operate in the stock and bond markets. Also, commodities index funds must constantly roll their futures positions forward as their existing futures approach expiration. This relieves buying pressure on nearby futures. The Rogers funds, in fact, buy only futures two delivery periods away from expiration.

Finally, the large commercial interests that trade commodities aren't about to let speculators wrest control of prices. "ExxonMobil can drown all the index funds, hedge funds and other speculators in the energy markets if anyone tries to manipulate prices," Rogers asserts. "It's largely the surging global demand for raw materials that is pushing prices up."

It should also be noted that copper and zinc, the commodities that have gone vertical in the charts above are poorly represented in existing commodity indexes. In the Goldman Sachs Index cited above, these base metals account for two percent and one percent of the total index, respectively.

In conclusion, and again demonstrating the inappropriateness of the title of this article, the following prognostication is offered.

THE COMMODITY BOOM, like all bull markets, eventually will end in a crescendo of hysteria. The public will feel an overwhelming desire to invest in raw materials rather than stocks or bonds. Financial publications will be chronicling the derring-do of commodity kingpins with the reverence and wonder once accorded the dot-com billionaires. Seemingly insatiable demand for commodities will provoke investment in new sources of supply, but few investors will notice as supply and demand start to come back into balance

But that day won't dawn for a decade or so, says Rogers, who hopes to be on to the next big thing by then.

Recent talk of a commodity bubble bursting seems awfully premature and maybe somewhat of an instinctive, defensive response from a financial media that has been conditioned for more than two decades to just promote stocks and bonds.

The public is not on board yet - not by a longshot. The public is either thinking about how to make next month's mortgage payment or still dreaming of granite countertops - how to divest themselves of a good portion of the money that has piled up in their houses in recent years.

There is no hysteria save for the financial media who were reluctant to call housing a bubble but eager to apply the label to commodities as a whole, when only a few items have experience extreme price rises, many still far below nominal highs reached over two decades ago.