Mr. Rogers: Lovely days are long behind us

Jim Rogers has never been a shrinking violet when it comes to expressing his opinions, and he was true to form last week in an appearance at a Reuters investment conference in New York

Jim Rogers has never been a shrinking violet when it comes to expressing his opinions, and he was true to form last week in an appearance at a Reuters investment conference in New York.

Ireland and Greece should have declared bankruptcy, Ben Bernanke doesn’t understand economics, and college students should abandon their finance programs and study agriculture or mining, Mr. Rogers told attendees at the conference.

The legendary investor, who co-founded the Quantum Fund with George Soros in 1973, also predicted further turmoil and volatility in financial markets in the coming years — largely as a result of irresponsible governments and money-printing central bankers.

“We’re going to have more crises down the road,” he said. “The politicians keep delaying the problems rather than dealing with them.”

One of the earliest and fiercest critics of the U.S. government’s bailout of the banking sector and more recently the European Union’s attempts to stave off sovereign-debt crises in Greece and Ireland, Mr. Rogers contends that both the U.S. and Europe are headed for years of decline because of their loose monetary policies and rescue tactics.

“Things may look better for a while, but I’m very worried about the longer term,” he said.

Despite having positions in both U.S. dollars and the euro because “everyone is so pessimistic,” Mr. Rogers predicts that the euro will not exist in 15 years and that the U.S. might default on its debt in the next five years. He is currently short U.S. Treasuries.

With the market’s recent shift into riskier assets, it’s tempting to write off Mr. Rogers’ comments as one more rant from a modern-day market Cassandra.

“Jim has been laughed out of the box several times during this market rally,” says Kathy Boyle, president of Chapin Hill Advisors Inc., a fee-only financial planning firm. “Investors are buying more-risky assets now.”

Ms. Boyle credits pension money that missed much of the market rally, and is now chasing yield for the continued rise in U.S. equity prices despite a lot of bad news. She thinks the rally will extend into next year as investors with traditional allocations get comfortable, but she doubts that it is sustainable. She agrees with Mr. Rogers on much of his long-term analysis of the U.S. and European economies.

“He’s right about the balance sheets in this country. The debt service here is huge and will continue to burden us,” she said. She also thinks the European Union solution to Greece and Ireland’s problems won’t work. With yields on the debt of Portugal, Ireland, Italy, Greece and Spain ballooning in the last year, “those countries won’t be able to refinance and survive.”

Ms. Boyle is advising caution. For many of her clients, she is implementing a program designed to capture 70% to 80% of the upside in the U.S. stock market, while protecting against the downside — largely through the use of bearish exchange-traded funds. “I’m a bear. I don’t know what the trigger will be, but I expect some geopolitical event will end this optimism.”

Charles Zhang, managing partner of Zhang Financial, an LPL Financial affiliate, is similarly cautious about the longer-term outlook for the U.S. and particularly European markets, but optimistic in the short run.

“If the S&P 500 rises another 20%, I would be reallocating, but I think we’ll be OK over the next six to 12 months,” Mr. Zhang said. He is currently favoring high-yielding large-cap stocks such as Kimberly-Clark Corp. (KMB), Procter & Gamble Co. (PG) and Kraft Foods Inc. (KFT), betting that their already solid earnings will increase along with any inflation.

Although Mr. Zhang agrees that the debt burdens in the U.S. and Europe are a major long-term problem, he doesn’t fault the government for its response to the financial crisis. “I think they did a good job. It’s easy to say that we should have let [Citigroup Inc.] or Bank of America [Corp.] go down, but if that happened, we would have been facing a much bigger crisis. People wouldn’t trust the system,” he said.

For his part, Mr. Rogers is sticking to his story, arguing that the U.S. government’s economic policies — including the Federal Reserve’s recent bond-buying program — are setting the country up for a Japanese-style lost decade of low growth and dismal securities markets.

Now based in Singapore, where his daughters are learning Chinese, Mr. Rogers is more optimistic about Asia’s economic outlook. He said Singapore will benefit from China’s high rate of savings and investment, which will fuel an extended period of growth. “People work hard there and they save their money. I buy renminbi whenever I can,” he said, referring the official currency of the People’s Republic of China.

One of the more prominent commodities bulls of the last decade, Mr. Rogers also continues to favor real assets over financial ones. Despite continuing signs of economic weakness in the U.S. and Europe, he suggested that commodities in the energy, metals and agricultural sectors offer the best protection to investors.

“There are shortages developing in the commodities sector and they’ll only get worse. If the world economy improves, it will help commodity prices. And if it doesn’t, central bankers will print more money — causing inflation,” he said.

To a point, both Ms. Boyle and Mr. Zhang agree that investors should have some exposure to commodities, particularly given their lack of correlation with financial assets. However, Ms. Boyle recommends caution, as many commodities, gold most notably, have had significant run-ups in price over the last year.

So what would the always pragmatic Mr. Rogers suggest that President Barack Obama and Fed Chairman Ben S. Bernanke do to improve the situation?

“I would tell them to abolish the Federal Reserve Bank and resign their jobs,” he said.