Book Review: Jim Rogers' Street Smarts aka Thoughts from a Southern Gentleman

Jim Rogers has had one heck of a life. From a small town in Alabama to the Ivy League to all around the world on a motorcycle, his insights are never preachy. He covers a wide range of topics, including one particularly negative anecdote about his former co-worker, George Soros. (FYI: even back in the day, consent decrees were worthless.) 

Big on commodities, Rogers promotes farming as the job of the future. He reasons food prices have been too low, and--just as in gold/silver mining or oil exploration--low commodity prices usually cause fewer producers and/or lower production, often leading to a crash. As prices and producers decline, new (and presumably more efficient) investors, seeking profits, will enter, rebalancing the supply/demand equation. At some point, prices will rebound, and the higher prices will create a snowball effect for both buyers (no longer concerned with deflation) and producers, especially if banking institutions issue loans. The alternative, a government-controlled economy, is inferior because it generally will not allow entities to fail. An avowed capitalist, Rogers explains, "The cure for high prices is high prices. It always works...." "The Soviets did not have anything because nobody produced anything, and nobody produced anything because prices were set so low." 

To his credit, Rogers realizes the flaws in his own paradigm and lambastes the Federal Reserve's easy money policies. Excessive Federal Reserve economic intervention is harmful, he argues, excoriating both Greenspan and Bernanke. In Rogers' experience, capitalism provides a self-reinforcing mechanism for regeneration aka creative destruction. It's true Rogers is known as a "bear," which means he makes money when companies fail, but the characterization of bias is unfair--every hedge fund manager sells short. 

Readers interested in politics will enjoy Rogers' comments on domestic and international affairs, including details about his new home, Singapore, and his reasons for relocation. 

On the black market.

Two passages stand out: 1) "As recently as 1987 the United States was a creditor nation."; 2) "America is borrowing money to pay for military hardware that sits and rusts in the sun. The man who manufactures the hardware makes money, but after that, there is no beneficiary. The investment does not represent an ongoing source of production, the way a canal or a railroad does." 

There are too many jerks in the financial world, but Rogers seems to be one of the good guys, someone who's never forsaken or forgotten his humble Southern roots. 

© Matthew Mehdi Rafat (2017)

Bonus: Rogers shares a lot of information on Singapore. See below for excerpts.

The "genius of Singapore": public housing programmes for all.

HDB flats in Singapore (2018)

Commodities, Cap and Trade, and Natural Gas

There's a lot of hubbub about H.R. 2454, otherwise known as the "cap and trade" program. My main criticism is that is that cap and trade programs require inter-country cooperation to be effective, but inter-country enforcement mechanisms have not been clearly defined or tested. What will the U.S. do, for example, if China "cheats" on carbon emissions? China, after all, uses mostly coal for its energy needs. (Perhaps we'll have some version of the International Atomic Energy Agency (IAEA), but for carbon checks.) Another problem: although heavy-handed enforcement will strain relations between countries, a heavy hand is necessary to convince everyone to play by the rules.

In any case, I jumped into commodities earlier this week (a few days too early), and am happy to hold UNG, FCG, WMB, WPZ, GSG, COP, and DBC. If approved, President Obama's cap and trade program will reduce coal and encourage more natural gas and solar power. Thanks to environmentalists, America may finally be able to reduce its use of "dirty" energy sources, including oil.

As I've already pointed out, the "cap and trade" program is not perfect--the government may end up artificially increasing certain commodity prices by transferring subsidies from coal to other energy sources. Even so, I'd rather subsidize clean energy than environmentally harmful energy sources.

Owners of Market Vectors Coal ETF (KOL) might want to assess the impact of the cap and trade program very carefully. Although it provides some exposure to Chinese coal companies, all coal companies will remain an uncertain bet as cleaner energy becomes more viable. After all, why would power plants use coal when they can use natural gas? From the EIA:

In the electric power sector, natural gas is an attractive choice for new generating plants because of its relative fuel efficiency and low carbon dioxide intensity. Electricity generation [will account] for 35 percent of the world’s total natural gas consumption in 2030, up from 32 percent in 2006.

You might still be wondering, "Why natural gas? Why not nuclear, wind, or solar companies?" Elementary, my dear Watson--it's the simple process of elimination.

First, America has far more natural gas than petroleum. Many Americans already know we have more natural gas than oil, but I am very surprised to see so many people overestimating cap and trade's foreign policy implications. If you think switching to natural gas will crush foreign regimes, don't kid yourself--the Middle East still has the world's largest supply of natural gas. I am willing to bet that in ten years, Russia and Iran spearhead a new natural gas "OPEC." That's okay--America won't ever be as dependent on natural gas imports as it has been on petroleum imports. In fact, Canada will probably be the largest foreign beneficiary of increased natural gas use.

Second, wind power looks D.O.A.--T. Boone Pickens, its most visible proponent, has scratched the idea, at least in Texas. That's not a good sign for the Pickens Plan.

Third, solar power is more complicated than it looks because it requires lots of empty land to put all the solar panels a power plant requires. Solar panels are most effective when powering relatively small structures, like houses and outdoor emergency phones. In any case, I don't know of any solar power plants that can supply power on the same scale as traditional power sources. (I am not an expert on solar power, so I appreciate being corrected if I am wrong.) At least for now, solar will not displace natural gas, but will probably work in conjunction with it.

Fourth, nuclear power suffers from a major image problem. Chernobyl will force legislators to hedge their bets on other energy sources and/or slowly adopt nuclear power.

I hope I've adequately explained why I believe natural gas has a bright future. If we're weaning ourselves from "dirty" energy like oil and coal, and solar and wind power have years to go before effective nationwide use, what's left? Aside from nuclear power, which suffers from a NIMBY problem, there's just natural gas. (Please don't get me started on ethanol--the idea of driving up food costs to get oil is untenable--and both Alan Greenspan and Charles Munger agree.)

Mind you, I do not expect natural gas prices to rise immediately. Even if the Senate approves the cap and trade bill, also known as H.R. 2454 (American Clean Energy And Security Act of 2009), it will take years for demand to dent the current supply of natural gas.

Why, then, am I buying natural gas and commodities companies now? Two reasons: one, current natural gas prices seem relatively low; and two, if Congress removes certain subsidies for natural gas companies or does not supply them with adequate incentives, companies will halt or reduce natural gas drilling, which will reduce supply and increase natural gas prices.

You might also wonder why I own ConocoPhillips (COP), an oil company. Petroleum will continue to be an important resource (petrochemicals, etc.), and many oil companies also have natural gas interests. In addition, oil companies sell an essential product and pay high dividends (unusual in our current era of 1% money market rates). I also don't mind buying anything Warren Buffett owns.

It is important to note that I hold all of my commodity-based shares in a retirement account to minimize taxes. Owning UNG in a regular account creates tax implications because of its partnership structure. I am not certain, but apparently, UNG does not pay out distributions, but imputes income to its investors anyway. Any more information on UNG's tax issues would be appreciated. (Feel free to leave a comment, especially if you're a CPA.) UNG's tax structure doesn't affect me because I hold my shares in a retirement account, but I am still curious.

Regardless of whether H.R. 2454 passes, the future of the energy industry is clear: the winner will be either nuclear or natural gas. I am choosing natural gas because it has a higher chance of widespread adoption. Fairly or not, nuclear power will always be linked to Chernobyl, Three Mile Island, and Davis-Besse, which reduces its appeal.

Disclosure: I own UNG, FCG, WMB, WPZ, GSG, COP, and DBC. I have recommended to family members to sell KOL if they own any shares.

Disclaimer: The information on this site is provided for discussion purposes only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence. To summarize, I do not provide investment advice, nor do I make any claims or promises that any information here will lead to a profit, loss, or any other result.

Update: Of the 20 million barrels of oil consumed each day, 40 percent is used by passenger vehicles, 24 percent by industry, 12 percent by commercial and freight trucks, 7 percent by aircraft, and 6 percent in residential and commercial buildings. (Source) Cap and trade will first impact the 30% slices (industrial and commercial/residential building) of the energy consumption pie, because not enough automobiles currently run on natural gas.

Bonus: below is an interesting link from the State Department on energy use:

http://www.state.gov/g/oes/rls/rpts/car/90316.htm

Asset Allocation based on Mohammad El-Erian

Here is an interesting article regarding an asset allocation model:

http://www.thestreet.com/story/10464086/1/an-el-erian-fund-for-the-masses-using-etfs.html

The author bases his ideas on Mohammad El-Erian's proposed investment model. Mohammad El-Erian was Harvard's former endowment fund manager. The following funds/ETFs are mentioned in the article:

LBNDX MUE NVG IJR IGOV DBA IGF

Personally, I am surprised DBC and TIP are not on this list. I currently hold some DBC and TIP and am looking to buy more. Whenever TIP dips below 100/share, I consider buying more.

Update on July 2, 2009: following El-Erian's belief that commodities will steadily increase in value over time, I bought UNG, WPZ, USL, GSG, COP, and SLV. I don't see human populations declining, which means that more resources will be needed.

Natural gas, on the other hand, is a unique commodity that may experience dramatic price fluctuations. Unlike oil and gold, there's plenty of readily accessible natural gas, but if Americans shift from oil to gas, natural gas prices should slowly increase.

Update on July 7, 2009: I added to the July 2 positions except for USL and SLV and opened a small WMB position. What a wild ride this week has been for commodities. I am holding all of these shares in a retirement account to minimize taxes on any dividends/distributions.

Update on July 22, 2009: yesterday, I sold most of the holdings mentioned above--some of them increased 20% in less than a month. I am not a greedy man, and I am concerned that the market may decline when unemployment benefits start running out and CIT experiences liquidity issues again.

The information on this site is provided for discussion purposes only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence. To summarize, I do not provide investment advice, nor do I make any claims or promises that any information here will lead to a profit, loss, or any other result.

Gold in National Geographic

National Geographic Magazine's January 2009 issue has an article about gold:

http://ngm.nationalgeographic.com/2009/01/gold/larmer-text

While investors flock to new gold-backed funds, jewelry still accounts for two-thirds of the demand, generating a record $53.5 billion in worldwide sales in 2007. For all of its allure, gold's human and environmental toll has never been so steep. Part of the challenge, as well as the fascination, is that there is so little of it. In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools. More than half of that has been extracted in the past 50 years. Now the world's richest deposits are fast being depleted, and new discoveries are rare.

I cannot understand why people and central banks are willing to pay so much for gold. It has less utility than platinum and silver. Most items that rely primarily on scarcity to attract consumers eventually lose demand and their high value. With gold, however, consumers can't seem to get enough. At least gold's value is not artificially inflated, as with diamonds (See DeBeers litigation). Still, I cannot think of another product whose attraction has such little correlation with its utility.

With platinum and gold selling at similar prices, I would probably go for the platinum. For now, my only precious metal is silver, which I own through a silver trust ETF (SLV).

Update: the print edition of the National Geographic has two charts on page 42 and 43 that are worth a look. One is called, "What it's worth," and the other is called "How it's used." If readers find a link to the charts, please let me know or please post a comment.

Bonus Round: Steve Forbes on gold.

Bonus Round 2: from the Italian Job, about gold: it "is our only refuge."

Update on 12/23/08: here is a comment I posted on seekingalpha.com, in response to other comments:

I appreciate all of your comments, but the only one that makes sense to me is Albert Ling's. He says that expensive products are expensive precisely because of their lack of utility. Although he doesn't expand on his hypothesis, he makes sense. The low utility of certain products, including gold, reveals an important trait--namely, that their buyer can afford useless objects, confirming the buyer's high disposable income, and therefore status.

I don't disagree with the ultimate end of the gold bugs, which is to establish a hard currency. Once most central banks moved away from gold and into fiat currency, gold no longer qualified as an agreed-upon unit of currency. Only if we return to the days of hard currency will gold have value because of its utility in determining currency. Until that day, its value seems to be linked to consumer demand and perception rather than utility.

Other people argued that almost no other products have prices relating to their inherent value, citing beachfront property; Mona Lisa; and Apple stock. Those examples are somewhat inapt.

1. Beachfront property has value because it is something that is necessary--shelter. It can also be used every day. Gold is not necessary, while shelter is required for most people.

2. The Mona Lisa has value because it is a unique historical artifact. Unique historical items tend to be valuable, despite their lack of utility, because history has value to most human beings. Therefore, I have no logical hangup with a historical painting connected to Leonardo da Vinci and the Renaissance having value. The Mona Lisa's value is inherent in its existence, which links it to a specific time period that will be studied as long as human beings exist.

Other paintings, however, especially so-called modern art, may have no value in the future. I would never buy a MoMa painting.

3. Apple stock is a harder one to analyze. It has no utility at first glance, because it does not pay dividends. (Many value investors avoid non-dividend paying stocks, because they don't see any definite return.) Yet, Apple stock has utility because it is easily traded, like currency, for other things, which do have utility. Gold is not easily traded for cash all over the United States. Apple stock, on the other hand, once liquidated, will buy a farmer in a rural area as well as a NY banker in a big city immediate utility. Therefore, its utility lies in its quick, convenient conversion into a unit that confers utility.

Investment Outlook

My personal sentiments regarding the stock market are similar to Jim Rogers'. Basically, I am overweight commodities and just bought a Commodities ETF (DBC). I also added to my Canadian dollar position (FXC), as an indirect play on commodities.

I disagree with Mr. Roger's assessment of American stocks being too expensive--many "blue chip" technology stocks appear cheap because of their high net cash holdings and market share. T. Rowe Price holds my 401(k), and around 17% of my 401(k) is in its Science and Technology fund (PRSCX). This particular fund has a relatively high percentage of its holdings in semiconductor companies.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

On Commodities

From Donald Coxe, Global Portfolio strategist of BMO Financial Group:

This is not the end of the commodity bull market. Bear Stearns, F&F and other crises will one day seem trivial. The new global middle class that is repricing commodities never will.

I am behind the curve when it comes to investing in commodities. Right now, the only one that looks interesting to me is UNG. I did pick up very small amounts of GLD, GDX, and SLV today because I had no precious metals in my portfolio. ( I just thought of Gollum when I said "precious" metals--like I said, I'm really behind the curve.) Deep down, I think Swiss francs (FXF) represent a better hedge, and I own some FXF, but I see the merits of owning some Gollum, er, precious metals in an inflationary environment.