Jim Rogers and Bill Gross on Bloomberg

Billionaires Jim Rogers and Bill Gross were on Bloomberg Video yesterday. It sounds like Rogers is doing his best to unload his New York mansion so he can move to China and, since he shaved off his mustache and hired Alan Greenspan as a consultant, Bill Gross hasn't made all that much sense.

First, Jim Rogers...

Host: Since the start of the year commodities have posted their highs for the year. The Rogers International Commodity Index is up three percent year-to-date. It has been a bumpy ride up however, in part because of investors shifting views on demand from China. If anyone knows about demand from China it's the man who founded that index, Jim Rogers, and he joins us now. What's your perception on demand from China? How is the economy in China?

Rogers: The Chinese economy is doing extremely well and it will continue to do well for the rest of our lifetime. Of course there will be setbacks, recessions, and other problems, but China's the place to be. I'm trying to move to Asia.

Host: Is demand for commodities going to remain strong. There's some thought that the government is trying to cool things down and that the Chinese are working on other sources internally for a lot of the commodities.

Rogers: They are trying to develop internal sources, everybody in the world is, because prices are going through the roof, but it takes a long time to bring a new zinc mine on-stream even if you find it. So, yes, they will develop new sources if they can find them, but it's not going to be enough - China's got 1.3 billion people. There are going to be setbacks - for instance I wouldn't buy nickel today because it’s been skyrocketing - I wouldn’t buy it, but there is still going to be a huge demand for it coming out of China and all of Asia.

Host: Speaking of going up like a skyrocket, a lot of people are worried about the Chinese stock market. A lot of people are calling it a bubble - Alan Greenspan called it a bubble, Li Kai Chang called it a bubble. What do you think?

Rogers: It's an incipient bubble if you asked me. I own Chinese shares, but I'm not selling any. If it doubles again, then I'll have to sell because then it would be a full-fledged bubble. I'm hoping that saner heads will prevail, where the government can do something to get the prices down 40 or 50 percent - so I can buy more - and then they wouldn't have such a terrible bubble.
...
Host: We have a chart of your commodities index here...big gains today driven by wheat, the biggest mover on the index today. Agriculture is one of your favorite sectors.

Rogers: Agriculture is just about the best thing I know to invest in for about the next eighteen months or so. Most stocks around the world are overpriced - agriculture is very depressed and has been for years. The fundamentals have changed very dramatically. That's about the only thing I know that I'd put new money into.
...
Host: Before we let you go, you mentioned Alan Greenspan. The Fed is talking a lot about inflation, where do you see it going?

Rogers: Well, there is inflation. There's been inflation for a long time. People write to me all the time asking, "Where does the government shop?" They keep telling us that there's no inflation, but there is inflation. Prices are going higher, inflation is here, and the government's been lying to us about inflation...

If anything, Jim Rogers is consistent. He's been very consistent since starting his commodity fund in 1999 - in retrospect, this must have seemed completely nuts at the time.

For a completely opposite view on inflation, the importance of the "core" rate, the housing market, and how the manager of the world's biggest bond fund could have been so wrong about short-term interest rates, Bill Gross...

Host: We've been seeing bond prices decline and yields on the ten-year soar to five year highs. Does Bill Gross, manager of the biggest bond fund, sees interest rates staying right where they are for now or moving lower? Joining us is Bill Gross, chief investment officer at Pimco. Bill, why did we see such a dramatic move last week?

Gross: It's hard to know because expectations for the Fed haven't changed that much and also the economic news in terms of inflation and growth - they weren't substantially different last week from the week before. What I think happened, and is still happening now, is a transformation in real yields and a reconfiguration of the yield curve. In other words, term premiums - 5-year, 10-year, and 30-year - are increasing, not necessarily because of a fear of inflation, but because of a recapturing of yield premiums relative to where they have been historically.

Host: I wonder if you've heard the comments today by the Cleveland Fed President in Ireland that some inflation remains and that inflation is uncomfortably high. What's your reaction to some of those issues on the inflation front now being raised?

Gross: I think that's standard Fed speak. I wouldn't expect anyone from the Fed to say anything else until inflation was "all clear".

Host: Has that ever happened?

Gross: Well actually it did - at one percent…when Bernanke talked about deflation, so sometimes it happens. "All clear" probably doesn't happen until one and a half or 1.6 percent on the core and you're going to hear the Fed talk about inflation for a long time to come - that's their job. But I think inflation is coming down. The core has broached two percent, if only by one-hundredth of a percent, and as we get an output gap in industrial production, we're going to see inflation coming down gradually. Not to the one percent level we saw years ago, but certainly below two percent.

Host: I want to get your expectations on what the Federal Reserve is going to do and when.

Gross: Well, the Fed at five and a quarter is on hold and has been on hold for a year. I expect them to stay on hold until that inflation number comes down and stays down. That may take upwards of six months or it may take longer. It's highly dependent on the Fed itself and it depends on what happens in the housing market. The housing market isn't directly affected by the Fed funds but by the ten year and the five year and the thirty year rate. And now, the conventional thirty year mortgage rate is drifting close to seven percent. Seven percent is a big number, either for people refinancing or buying a home. It's certainly nothing like they experienced two or three years ago which led to the housing boom. So now we're having a housing bust and to the extent that continues based upon these higher interest rates, then economic growth will be weak and inflation will be a little lower and ultimately the Fed can ease. I think that's ultimately about six months down the road.
...
Host: Earlier this year, you thought the Fed was going to make a move. What changed in the economy to change your views?

Gross: Well, the short answer is "not enough". In other words, we didn't get slow enough growth. Yes, we've had a quarter of less than one percent growth, but for the most part, employment is little changed. We still continue to see jobs added, unemployment is not going up as it was supposed to in that type of environment. Because of that, it was obvious that the Fed didn't have to move. The Fed has two constraints here. One, housing, in terms of the downside, but with the upside they have private equity, the stock market, and asset markets moving higher so they're constrained by these two opposing ends that balance each other.

Bill Gross has a long way to go to gain back the respect he's lost over the last year with his horrendous interest rate call. Talking like Alan Greenspan isn't going to help.