CNBC - Jim Rogers: Inflation Down the Road

Dear Friends,

I respect Commodities King, Jim Rogers very much. This video is worth watching, if anything, it is by far, the most confrontational interview he has had with CNBC.

Mr. Rogers looked quite exasperated by the fact that CNBC commentators don't seem to understand his viewpoint on Inflation, and the error in bailing out the banks.

Investing in Commodities

In my opinion, despite my deep respect for Mr. Rogers' opinion, investing in commodities is wrong, at least for the foreseeable future of 2 years, from a fundamental perspective. Why? Because there is no way to forecast demand which is decreasing rapidly, in a fast deepening recession.

In such a situation, commodities are goods that are not differentiated, and tend to be the worst hit goods in terms of price falls. Don't get me wrong. I do agree that due to the arguments of Peak Oil, and inelasticity of demand (to a certain extent only, because even consumption of oil is dropping), the longer term demand for oil will cause price to rise. However, that is in the longer term, when the world economy picks up again, and thus, I believe that Mr. Rogers is way too ahead of this demand curve this time.

Having said that, I do agree with Mr. Rogers that the end of the downturn, from a Secondary Medium Term Wave perspective, which he calls a Selling Climax, should be about here. Oil at US$63 is too low, too soon. There should at least be a Secondary Uptrend Correction to the Primary Downtrend Wave. Thus, don't be surprised to see Oil Price rise in the Medium Term, more from a technically oversold position than from fundamentals.

What's the difference? A rise from fundamentals is a trend that is consistent with the Primary Trend, i.e. the Long Term Trend. However, technically, the Long Term Trend is a Downtrend today, and thus, Oil is already in a Primary Bear Market. Any rise in Oil Price from here, is a Technical Correction of the Secondary Medium Term Wave, which will most likely, go near the Price at SMA200 which currently stands around US$110 per barrel, but will not likely breach it, before resuming its Primary Downtrend.

The Medium Term Correction Wave will be a result of overreaction in the market, and thus, Price will reverse and start to move back towards the fundamental consensus of US$110. If you remember, it was only "yesterday" (more like a month or two ago), that "investors" (if you can invest in a commodity), were of the general opinion that Oil at US$90 was a good buy.

However, due to the distress selling by Commodities Hedge Funds, the picture has been severely distorted.

From the angle of the Law of Mean Reversion to the SMA200, i.e. the fact that Oil is technically grossly oversold, a Medium Term Long Position Trading Strategy is not wrong, and in fact, is possibly the sane and right thing to do.

Thus, whilst I disagree with Mr. Rogers on the 2 Year Outlook i.e. I am bearish from a two years' perspective as opposed to his bullishness, I am bullish in the Medium Term of the next 3 weeks to 3 months.

I am not so bullish on the rest of the commodities, not even Gold. Although the Medium Term Correction Wave may be forthcoming as well, as Gold tend to rise with Oil, my opinion is that it should not move as strongly as Oil. This is because Gold is only valuable in two situations, i.e. "Flight to Safety" in times of abnormal crisis, and "Hedge Against High Inflation", which was the case for the last few years, but no longer the case in the foreseeable future of next two years. Gold will fall further from US$700 to even US$600 in the longer term.

Inflation as a Future Economic Problem

As for Inflation as a future economic problem, I have already discussed this issue in my blog entitled Inflationary Holocaust - The Problem of Printing Too Much Money. Such a situation may, or may not arise - no one knows. We have to prepare for such an eventuality, but let's not cry wolf too fast.

Of course, by the time we see it coming, it will be too late to do anything but damage control, which is probably why Mr. Rogers is so passionate about this issue, which is not understood by the rest of the world.

My opinion is that the Federal Reserve has to watch their economic action steps very carefully. The idea of economic stimulus / infrastructure spending is to spend very wisely for job creation, and not spend, for the sake of buying GDP numbers, but not at the benefit of the average man on the street.

This was why I don't agree with economic stimulus packages that merely return money to tax payers. It is the 2nd most costly form of Government Spending, that is ineffective. Of course, the most costly form of Government Spending is to build a white elephant monument at huge expense at no benefit to anyone but a few contractors.

Bailing Out of Banks

Lastly, on the issue on the "Bailing Out of Banks". Mr. Rogers is proposing that there is a difference between what Mr. Bernanke, the Federal Reserve Chairman is doing, i.e. Bank Bailouts, and what was needed in 1929 Great Depression Era. He explained that Mr. Milton Friedman, the Nobel Prize Winner in Economics, had showed that one of the biggest issues that aggravated the Great Depression was the lack of and withholding of liquidity by the Federal Reserve then.

Mr. Rogers is making a case that the provision of liquidity is not the same as bailing out of banks. This is a very interesting proposal, and I must admit that I had always thought them to be the same, as was the view of the rest of the world economists.

If I understand correctly, the proposal of Mr. Rogers is to let the banks with toxic assets fail. Why put in good money (taxpayers' money that has not even been paid by taxpayers) to buy toxic assets? Instead, the US Government should focus on providing liquidity to banks that are well managed and will not fail due to toxic assets.

I agree that this proposal would certainly limit the amount of money to be printed to a much lesser extent, and thus, burden the Government and taxpayers, a lot less. From this perspective, this proposal is desirable to bailing out banks with huge losses. The argument that the Government MAY come out of the banking and economic crisis with a profit is irrelevant.

When has it been the objective of any Government to use taxpayers' money, which has not even been paid yet, to speculate in toxic assets in the hope of making money?

However, Mr. Rogers' proposal does not solve the problem of consequences of bank collapses, and with it, the evaporation of the lifetime savings of many normal, conservative people. Without confidence in the banking system, there would be many "runs" on banks, both the bad ones who should fail, as well as good ones, merely the victim of circumstances or wild rumors.

In my opinion, there is a need for US Government to recapitalize the banks, but not pay for toxic assets. In this proposal, the idea would be to let the banks fail, and then come in and put new capital at the discounted valuation. In this case, taxpayers would be owning a "clean" bank at asset value net of all the needed provisions for losses.

However, such a proposal also has a flaw in that it still does not deal properly with the shortfall in amounts due to depositors. Here, the Government has to make good whatever monies that is guaranteed by FDIC. For the amounts exceeding the guarantee, the Government will have to consider the amount exposed, and then decide when more information is at hand. What is important is not to buy toxic assets at a price higher than necessary, and bail out existing shareholders for their loss.

In any case, the discussion is academic since the Bank Bailout Plans have been rolled out. Or is it? I think the bailout is not set in stone, and if Mr. Obama wins, he may actually push against such a plan after he has access to more information, like how much it will REALLY cost in total? The figures might be so staggering that he may decide against the bailouts. I don't know. I'm speculating.

It is not possible for us to know exactly what is going to happen. It is our job to consider the various scenarios and cater for them in our decision making process.

Best wishes,

Ooi

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