Capital Preservation Investments

[amarksp]

Jim Rodgers interview:
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Q: What's your preferred approach to commodity investments -- futures, commodity company stocks, other?

A: Futures nearly always do better than stocks. A recent Yale study showed that one would have done three times as well investing in commodities rather than commodity stocks.

Q: If you had to put $5 million to work, what would your asset allocation be?

A: Commodities and foreign currencies.
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When it comes to stocks and bonds, Rogers says, "There will not be any great bear or bull period like there was in the 1980s and 1990s." he says. His pessimism also extends to the U.S. dollar, which he thinks will be in a decline for the next 20 years, with great volatility for all currencies in the coming decade.

The commodities Rogers says he would buy today are coffee, sugar, and perhaps cotton. For income in the difficult period he sees ahead, he suggests short-term interest-bearing paper -- he expects interest rates to be rising around the world because of a period of stagflation similar to the '70s.

These were a few of the points he made in an investing chat presented Oct. 28 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. A complete transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Jim, based on your world view, what's your take on the markets right now?
A: Well, the bond market has now peaked. It peaked in 2003 and will be in a bear market for 15 to 20 years, with rallies of course. The U.S. stock market will fluctuate up and down for the next 10 to 20 years. There will not be any great bear or bull period like there was in the 1980s and 1990s.

On the nearer term, I expect the years 2005 and 2006 to be difficult years in the U.S. stock market. That would extend to most Western stock markets as well. If you want to be in a bull market, you should invest in commodities. That's where we'll have a bull market for the next 10 to 20 years. The currency market -- I would suggest that people sell the U.S. dollar because it will be in decline for the next 20 years.

Q: Today's news of China's unexpectedly raising its key interest rate knocked down commodities prices and stocks. Is the commodities bull just about over -- or would you still invest in them at this point?
A: In every bull market there are many consolidations along the way. Commodities have been very hot for the past five years or so, so we're well overdue for a consolidation. I expect things to get worse in China. I expect there to be a hard landing.

But if you see the cover of BusinessWeek next year saying "Turmoil in China," reach for the phone and buy all the commodities you can and all the China [holdings] you can, because that will be your next great buying opportunity, if it happens that way. I'm not selling my commodities or my China [holdings], although I do expect further consolidation in both.

Q: It's my opinion that Bretton Woods is on the verge of collapse. What do you think will take its place?
A: I concur. I also concur that the U.S. dollar will suffer during this period. I would expect there to be a decade of great volatility in currencies around the world -- and perhaps even exchange controls in the U.S., eventually. I don't know what will take its place. I don't even see a currency that will replace the U.S. dollar as the world's reserve currency at the moment -- perhaps if things get really desperate, people may leap to gold for a while, but gold isn't something that can permanently solve the world's problems.

Q: Will this country be able to get rid of its debt? Are we heading for another Depression?
A: No country in the world that has gotten itself into this kind of debt situation has ever in history gotten out without a crisis or a semi-crisis. The same will happen in the U.S., unfortunately. And even then, we will not solve our debt problems. When England went from being the richest, most powerful country in the world, the situation declined for over three generations. We have entered a period like that as well.

Q: Going to China -- investment ideas to look for?
A: Well, it's too early to buy shares in China. I would wait for a hard landing next year. But start looking around and doing your homework while you're there. I don't know what's going to go down the most as China retrenches.

Q: You had mentioned a housing bubble about a year ago -- what do you think now?
A: Well, there's no question that there was and is a housing bubble in some parts of the country. It has already started leveling off and/or declining in some places. In others, it's still hot. Financial areas such as Massachusetts will certainly suffer housing losses as the bubble pops. Commodity areas such as Iowa will have nice housing markets for several years. The bubble is not everywhere and will not continue everywhere. It just depends on the location.

Q: Are you still high on international investing?
A: Yes. I'm high on investing in wherever the opportunities are, and that's often internationally. Therefore, yes, one should never limit one's investments to one country because you will miss great opportunities.

Q: Where would you look for income/yield?
A: That's a great question. I would not own bonds anywhere in the world unless it were a very special situation. I would keep my money in short-term interest-bearing paper and suffer a temporary lower income because rates will be rising in most of the world.

Q: Can one be a long-term buy-and-hold investor and make money, or does one need to be a trader?
A: Well, if you find the right instrument, the right security, then yes, you can be a buy-and-hold. But in my view, the next 10 to 20 years in the U.S. stock market, that will not be a satisfactory way to invest unless you find the few securities that might do well even in a period like that. The investors who'll do well are the ones who can buy low and sell when things rally and repeat the process throughout the decade.

Q: What commodities would be ripe for investing now, if any?
A: Oh, if I were going to buy a couple today, I would probably buy coffee and sugar, maybe cotton.

Q: How does an individual investor go about investing in cotton?
A: You can buy cotton futures -- it's very simple. I urge you not to do it unless you know a lot about cotton. I urge you not to do it on thin margin unless you know a lot about what you're doing.

Q: What's your outlook for gold and gold stocks?
A: I own some of both. I am less optimistic about gold than I am about many commodities.

Q: Does the energy sector still have a significant upside left?
A: Well, oil is overdue for a correction. But the price of oil will be much higher over the next few years. The surprise will be how high energy prices stay and how high they go.

Q: What do you think natural gas will do? What do you think of natural gas royalty stocks?
A: Natural gas will continue to go higher over the next few years. The question concerning natural gas royalty stocks is the status of their reserves. If they're not replenishing their reserves, the income will dry up as the reserves dry up.

Q: How about investing in traveling around the world?
A: It's a great experience. I urge everyone to do it. It's a wonderful way to find out what's really happening in a country and a wonderful way to find investments.

Q: From your travels, what countries did you find most intriguing for investment?
A: China, Canada, Angola, Australia, Tanzania, Ethiopia, Japan, New Zealand, and Bolivia.

Q: Why wouldn't interest rates come down if economies are slowing?
A: Because there is inflation in the world, and inflation will be getting worse. We'll have a period of stagflation, just as we did in the 1970s.

Q: Would utilities be a good investment in stagflation?
A: Not normally, because the costs of building new plants will rise dramatically. And they normally cannot get rate increases as rapidly as prices rise. However, in the next 10 years, there will certainly be a shortage of utility capacity in much of the world. So they'll be better this time around than last time.

Q: Are you shorting the U.S. dollar?
A: I'm not shorting the U.S. dollar, but I am moving money out of the U.S. dollar into other currencies. At this precise time, in fact, the U.S. dollar is probably overdue for a rally. So I certainly would not be shorting it now, or this week.

Q: What about water shortages? Our generation or next?
A: No, they're already occurring in our generation in various parts of the world. Those shortages will continue to get worse. For example, in the Southwestern part of the U.S. or in the area east of the Red Sea and other areas, if you can find a way to purify water, pump it, or move it to the needed areas, you'll make a fortune.

Q: I'm wondering about soybeans and Bunge (BG ). What's your take?
A: Well, I'm optimistic about most agricultural products, including soybeans. Bunge is not a grower of agricultural products, but a processor and handler of commodities. The growers will do better, but people like Bunge have traditionally done well also.

Q: What's your preferred approach to commodity investments -- futures, commodity company stocks, other?
A: Futures nearly always do better than stocks. A recent Yale study showed that one would have done three times as well investing in commodities rather than commodity stocks.

Q: Is silver a good investment now?
A: I own silver. I expect to make more in other commodities, but I do own silver.

Q: If you had to put $5 million to work, what would your asset allocation be?
A: Commodities and foreign currencies. And sometime this fall or winter, I would sell financial stocks short in the U.S.

Q: What about oil stocks?
A: Well, I own some oil stocks. I do not own U.S. oil stocks, I own international oil stocks. There probably will be a better time to buy them later as oil consolidates.

Q: What's the best way to invest in coal? Would you?
A: The only way I know to invest in coal is through coal shares, and I do expect coal to do well over the next several years. If you buy a coal share, make sure it has big reserves.

Q: Where should the average 401(k) investor keep his money?
A: At the moment, I would be keeping it in money-market funds.