In the May 2005 issue of Futures magazine, we included a conversation with Jim Rogers, co founder along with George Soros, of the Quantum Fund. Rogers, a college professor, author, world traveler, economic commentator and creator of the Rogers International Commodities Index (RICI), was talking about the worldwide bull market in commodities that he had written about in his most recent book “Hot Commodities.”
What was most memorable about that conversation and Rogers’ perspective was, unlike other market experts, Rogers was not peddling the next “new paradigm” but making a logical argument based on solid meat-and-potatoes supply-and-demand economics.
The other thing of course was how dead on he was in his analysis. Since he created the RICI in August 1998, it has produced a total return of 265.59% and a compound annual return of 18.21%, outperforming all major equity indexes as well as other commodity indexes.
This May as the metals sector experience a fairly major correction, many so-called experts started talking about a commodities bubble and about how the commodities bubble may be bursting.
These experts, for the most part, missed the technology bubble and never saw the bull commodity market coming. In fact guessing the next bubble appears to be a growing sport in the financial press. The problem is many of the analysts who are attempting to predict the next bubble missed the last one, have been constantly bullish the stock market, attacked alternatives to traditional stock and bond holdings and benefit from a equity centered investing.
With all this talk of a so-called commodity bubble, we decided to go back to Jim Rogers to get his assessment on the status of the bull market in commodities and get his opinion on all this talk of a commodity bubble.
Futures Magazine) Do those who suggest a burgeoning commodity bubble misunderstand what a bubble is and what is behind the current commodity bull market?
Jim Rogers) “Yes. If you read the Wall Street Journal everyday, there are eight paragraphs about commodities, there is a whole newspaper about stocks and bonds, if you read the Financial Times there are 10 paragraphs about commodities, there is a whole newspaper about stock and bonds. There are 70,000 mutual funds in the world for the public to invest in stocks and bonds; there are fewer than 10 for the public to invest in commodities, so if this is a bubble it is the strangest bubble I have ever seen. Most people have never bought a commodity in their whole life, it is very strange this talk about a bubble. Yes, some prices have gone up, zinc and copper for instance. But most commodities are far far far below their all-time high. Sugar is 80% off of its all-time high and if you adjust most of these prices for their historic highs based on inflation, these things are 80% or 90% below their all-time highs. Sure zinc and copper and oil have made all-time highs but even those, if you adjust for inflation, are below their all-time high; it is a very strange bubble if only four or five of the whole universe of commodities are at their all-time high. People who talk about bubbles don’t know markets, don’t know history, haven’t done their homework on what the facts are.
In bull markets everything eventually makes a new all-time and it usually is several multiples above its old all-time highs; this is nothing like a bubble, that is such absurd talk. You notice that people who make those statements are not people who saw it coming but people who couldn’t even spell commodities a year ago, didn’t know what a commodity was two years ago and now all of a sudden they are making pronouncements as though they know something about it.”
FM) Is this talk coming from people losing stock brokerage because of the growth in commodities?
R) Conceivably that is part of it. Many people are starting to learn about commodities, some investors are starting to move towards commodities, I guess people are worried that they would lose but I don’t think they are that Machiavellian or that smart. I think they are just people who have to say something to sound like they are smart and what actually is happening is they are embarrassing themselves showing how dumb they are.
FM) Are all the factors that caused you to believe we were entering a commodity bull market in 1998 still in place?
R) Nothing has changed since I came to the conclusion in 1998 that a bull market in commodities was about to begin. Nothing fundamental has changed since I wrote the book. Mines continue to deplete, oil fields continue to deplete. It is almost impossible now to get engineers, it is almost impossible to get workers, to get tractors or to get production machinery. It is almost impossible to get miners or lumberjacks. You speak to any CEO in the production business of metals or energy and even if they decided today to open new mines and gear up, they can’t get the people. They can’t get the equipment because everyone is capacity restrained. They can’t even get rail cars to move iron ore or agricultural products. Everybody is capacity constrained because nobody invested in production capacity for 20 years. That is a continuation of the same theme, the result of the same theme and it is making the situation worse and not better.
It is not like a dot-com where a couple of 18 year olds can go in the garage and start a company and bring it to market, this is real stuff and it is not easy.
FM) Have some commodities gotten ahead of themselves? Which commodities have the most potential?
R) If I were looking for new opportunities, I would be looking at agriculture because that is where you have prices that are still low on a historic basis but also where fundamental positive changes are taking place. I suspect new money now will be looking at agricultural commodities, whether it is coffee or cotton or whatever it happens to be. That is where you are going to find new opportunities, I suspect.
FM) Why so few mutual funds?
R) Most people don’t know about them. Even on Wall Street in the mutual fund community, very few people know about commodities and if they do think about commodities, they think about commodity stocks. They want to buy Exxon and BP. As you well know, stocks are entirely different than commodities but that is where people jump if they don’t know much about commodities. Not many people have been involved in the commodities business in the last 25 years. That is true on the financial side as well. Most people have not made that leap as yet. They will eventually.
FM) The tendency for analysts in this country to only think in terms of stocks is one reason for the lack of respect for commodities as an investment class. One of the recent stories in a major wire service promoted the idea of a commodity bubble with an example of an ethanol company that had grown exponentially without the resultant earnings. Problem is it is a stock not a commodity.
FM) There are ETFs on gold, silver and oil. Dow Jones AIG has created individual commodities indexes bases on the 19 components in their index plus cocoa. What is your opinion on Commodity based ETFs?
R) I don’t see anything wrong with it. Whenever there is a bull market in anything, people try and figure out more ways to invest in it. Whether it is in tankers or land or stocks or commodities. It is the normal course financial history, when you find a bull market, people say ‘I want to play’ and come up with some new ways. I am sure you are going to see a lot more of those. I guess it makes it easier for some people. There are all those stock brokers out there who are not registered to trade commodities who now call up their customers and say lets buy oil through the ETF. They don’t have to register as commodities brokers to sell an oil ETF. It will bring more people into the market. It is just the normal course of history.
FM) What products would you like to see available to retail investors?
R) Simple ways to invest in commodities. Futures are already there. They’re not nearly as dangerous as people say they are if they don’t leverage themselves. Mutual funds, ETFs, all these things. The only bull market in the world is in commodities and that is going to be in place for a number of years to come.
FM) Is there a danger to the market from commodity ETFs that must hold the underlying commodity?
R) I don’t see a danger. If silver goes up too much, I promise you the people who’ve got silver will dump it on the market. So I don’t see any danger at all. Just like with oil, if there is too much oil in the world, I promise you the people with the oil are going to dump it on the heads of the speculators. Speculators can have an affect on the market for a while; a day, a week but not very long. I will remind you that every day $6 trillion, with a T, worth of oil trades. The world uses 85 million barrels of oil a day, that is $6 trillion so all the hedge funds in the world if they got together could maybe affect the oil markets for about 20 minutes.
As far as the index funds, they invest in futures so that is hardly taking the commodities off of the market. The ETFs if they do in fact put them in the vault, yes, that is taking supplies off of the market but if the price goes up too much the people who got the stuff are going to dump it. You remember the 1970s when silver went to $50. Everybody was melting down their coins, their tea services because they couldn’t believe how high the price was and it drove the price of silver from $50 to $4.
Yale University and the University of Pennsylvania recently did a study and they came to the conclusion that over the past 45 years you would have made 300% more investing in commodities themselves rather than some stocks. With a stock, you have to worry about stock market the government the economy, unions, balance sheets, pension plans, hundreds of things. Natural gas does not know who Alan Greenspan is or who Ben Bernanke is and doesn’t care. All it cares about is if there is too much or too little. And it is going to go up or down [based on that]. But with stock you have to worry about a lot of other stuff. Natural gas has tripled in the last five or six years but Enron was a natural gas company and it went to zero. Natural gas can go down but it can’t go to zero.
Commodities are less dangerous than stocks; they are less volatile and certainly require less study and less analysis. I didn’t say it was easy and I didn’t sat it doesn’t take much work, I am just saying its easier to analyze a commodity.
FM) Why are people afraid of commodity investing?
R) The main problem is that most people grew up in stocks and bonds, they don’t know about commodities, they are afraid of commodities, they don’t know anything. There is no reason to be afraid of commodities. I will remind you that we all know a lot more about commodities than we know about anything. We didn’t know a thing about dot-coms but people were pouring money into them.
Before people go to work everyday they will use wheat, corn, rice sugar, coffee and orange juice; rubber if they go running, silk if they were a tie, cotton, wool, zinc, tin; they know what that stuff is, nobody had a clue what a dot-com was. So people already know a lot more about it but they are still scared because they don’t know how much they know and stock brokers tell them they’re dangerous. It is easier to analyze zinc than it is to analyze most companies.
FM) Are equity market vulnerable to a large fall?
R) Well, I’m bearish. I expect the U.S. Stock market to end down this year. I expect the U.S. to go into a recession or an economic slowdown sometime later this year or next year. I would be much more worried about the stock market than the commodities market but they both could go down. But if they do, stocks will go down more and stay down longer. In 2001, we had a big correction in commodities and in stock caused by 9/11; well commodities went down less and started going back up first. Stock right now are very vulnerable and most people should be selling shares, at least in the West.
FM) What is needed for more people to understand this; is it a large drop in stock prices?
R) You just need a continuation of the bull market in commodities. As people realize more and more that that is the place to be, more money will gravitate towards the commodity area and people will come up with ways to invest whether it is ETFs, structured products or mutual funds. I know the Mutual fund industry is under terrible pressure because ETFs and structured products are so much more attractive for the public and as commodities develop it is more likely that ETFs and structured products will come first because they are more attractive than mutual funds. The equity mutual fund industry and bonds has terrible problems facing it; overcapacity, poor returns, high expenses. ETFs are so much more efficient that I am sure you are going to see terrible pressures in the mutual fund industry.
FM) The most recent estimate of money invested in long-only commodity funds is $90 billion. Many analysts claim these funds are behind spikes in energy and metals. Will long-only funds begin to distort market?
R) Commodities markets are the second most liquid in the world after foreign exchange. I am not worried about investors coming into the market; $6 trillion [trades] everyday in oil alone. The oil market alone is bigger than all the stock markets in the world put together. Rice too, half the people in the world eat rice every day. There is a gigantic rice market out there. Yes, there will be more investors coming in but that has happened throughout history. In 1980, there were virtually no mutual funds in Europe and very few in the United States, now we have over 70,000 mutual funds in the world for the public to invest in stock and bonds; that had an affect on the stock market but most of them came because the market went up. Mutual funds didn’t just pop into existence and therefore the market went up, the market went up and as the market went up it made people get interested, more people bough mutual funds, it was a self reinforcing process. That will happen with commodities as well but listen, commodities are much more liquid, much bigger markets than all the stock markets in the world put together.
Yes new investors will have an affect but remember we had gigantic new investments in stocks and bonds with mutual funds hedge funds etc., somehow the world survived and somehow we had a long bull market and we eventually has a bubble as we usually do when a bull market goes for a long time. Commodities will be in a bubble some day, there is no question about that but it is a long, long way from that. You call me up in 2019, and I am sure I am going to say ‘please sell your commodities,’ and you will say, ‘don’t you know commodities always go up.’
FM) Have the long-only funds caused the cantango situation in crude oil?
R) I don’t know. Cantango and backwardation come and go in my experience. I have seen cantango and backwardation many times in all these markets but I don’t know.
Maybe the new funds are having an affect but again if they are, the markets are going to adapt because the people with the copper or the wheat or the corn or the oil are going to figure out opportunities and come to the market and the market will have to adapt again as it always has.
FM) While you are as bullish on commodities as ever, you have always cautioned that there will be correction — some major — along the way.
R) Sure oil could go down to $40. It could go lower if bird flu wipes out Europe or attacks Italy or something; everything is going to collapse, stock too. If that happens, commodities are going to go down less and will be the first thing to go back up.
FM) With some commodity sectors like energy and metals seeing huge spikes, do people need to hedge more of their commodity exposure?
R) I am a horrible trader, horrible market timer. In my index agricultural products are 35% of the index, you can conceivably have agriculture going up a lot because most of those (markets) are depressed and the fundamentals are changing, so what you should hedge I don’t have a clue, I will leave that to you and your smart readers.
FM) Other indexes have higher concentrations in specific sectors. The Goldman Sachs Commodity Index (GSCI), for example, has always been heavily weighted towards energy.
R) The [GSCI] is 77% energy. If one is long the GSCI one better be aware of that. Which will correct and when I don’t know. Sugar in the last bull market corrected 80% and then it went up 600%. That is the kind of thing that happens in bull markets when things start correcting. Stock in the bull market in the ‘80s and ‘90s had huge corrections.
If people are going to be investing, I hope they understand the makeup of what they are investing in. If you invest in the S&P 500, I hope that you know what is in the S&P 500. You don’t just buy it blind so you can figure out the corrections when it comes. When you look at the English stock market index (FTSE) it is heavily influenced by energy and mining. If you didn’t know that, if you just thought it was a broad brush of the economy, you might get whipsawed on the upside or the downside. I hope people look at what they are investing in.