Me and Jim Rogers

On the final day of the 2011 CFA Institute Conference in Edinburgh, Scotland I learned some things. For instance, we just suffered a ‘Black Swan’ financial crisis (meaning it was a very rare phenomenon I guess) and that most experts are worried we are in store for a ‘Market Reset.’ Funny how we people have a tendency to trivialize things we don’t really understand with nonsense expressions that contain no information at all. But if we repeat them enough suddenly these trivialities are assumed to have descriptive merit. Ridiculous!

Anyway, Raghuran Rajan, author of a book called ‘Fault Lines : How hidden fractures still threaten the world economy,’ is a professor of finance and like most experts spent much more time explaining what caused the crisis than talking about the future. Obvious conflicts of interest existed (still do) – a funny line he used was “if there’s no conflict there’s no interest.” But his rather novel explanation of the roots of the crisis is that US government policy has deliberately been using low cost housing to reduce the spread between the elite and the less educated/skilled in recent years. If average people own a house, and it appreciates in value they ‘feel’ richer and happier. This policy (low rates, Fannie Mae and Freddie Mac and availability of subprime mortgages) is a substitute for a poor social support system – over decades the percent of school graduates (training) in America has been stagnant, widening the income gap between the elite and common folk.

Many countries have been relying on exports for economic growth, but the perils of relying on exports is evidenced by Japan. Their manufacturing sector is super efficient (global) but the Japanese service industry is backward. Can you name any Japanese consulting firms? Their service industry is so inefficient there’s a barber (yes, haircuts) cartel to keep prices up.

Rajan had the best economic forecast: “Sunny with a chance of thunderstorms.” He expects localization of global industries to adjust to the new high growth markets. For example – refrigerators in India – they don’t need ice (so don’t require an expensive compressor) and the power supply in villages is erratic; and really only need food kept cold only during the hot day. So innovate (locals know best, not head offices in London) – rechargeable batteries ideal for power supply.

Probably the most fascinating presentation was by the Governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi (not a typo). Bank CEO’s stole from their banks using dummy companies, oil prices collapsed from $140 to $40 (the source of country finances) AND the financial crisis, all at same time. The fix? They removed all bank management teams, tried them and sent many off to jail. Welcome to Africa. As Sanusi said: “The bigger the boom, the bigger the bust.”. There was of course plenty of high powered resistence from rich friends of corrupt bank executives and politicians. The The solution – put their stealing and spending to buy villas and yachts in the press so these politicians would be reluctant to associate with them at all. He called it all improving Nigerian financial hygiene.

Should banks be Intermediaries or incestuous pools? Lending to agriculture went from 17% before the growth in ‘investment banking’ down to only 1.4% now. Real industries are starved for capital while banks lost megabucks speculating. Oil revenues and financialization (he made up a few new words) grew at the expense of real economy. I figure this has happened everywhere to some degree. He believes protection is necessary for domestic industry. Hmmmm. They introduced much stricter regulation – Banks cannot do equity trading, assume private equity risks etc. with depositor funds. And he charged the banks .3% of assets to pay the huge costs of the cleanup (plus the proceeds from the sale of collateral assets and contributions by the central bank). No more “corporatization of profits and socialization of losses” by banks. The best question from the audience? “Can you please take over the Fed?” Great concept though, make banks and investment bankers pay to fix the mess they created and not us. I’ve read enough history to know that such severe efforts to legitimize the socio-economic situation last only as long as the incumbent regime can avoid being slaughtered by more powerful, less ethical and more corrupt forces.

Jim Rogers is singing the same tune – it’s all about China and he even moved there.
Similar to what I wrote about in my first book ‘Resources Rock’ (published way back in 2004). Unlike us westerners, the Chinese are big savers – they have problems coping with growth yes, but are the largest creditor nation in the world. Education there is ridiculously intense.

He is planning to short bonds and is already short emerging markets. The US is the biggest debtor nation, and their next slowdown will be a disaster. He’s long cotton – the US dollar is made of cotton and all Bernanke knows is printing money. Ironically he admits he’s long US dollar for short term trade – but also admits he’s terrible market timer. Hmmm. When the UK ran into trouble with massive debt the British Pound collapsed and the country went bankrupt. He expects no less from the U.S.

He claims the commodity boom began in 1999 (it was way later by my reckoning fyi) and he is still a bull. You already know from my own past comments I disagree. When money managers get something right, they tend to stick with the same strategy so long they end up dead wrong. It may take a few years yet but I believe commodities will be the next crisis – like subprime mortgages, owning these ETF’s and hedge funds are not equivalent to owning real assets at all – they are ‘artificial’ commodities. Not commodity ‘assets’ – just paper. Sorry Jim.

What’s my take on all I heard from the experts? Too much talk of what happened which is now irrelevant, and very little about what will happen. Ideally, the entire world should do the same cleanup that Nigeria did. Won’t happen, but it is likely that there will be renewed interest by investors and banks (persuaded by governments and shareholders) in the REAL economy and real businesses. This doesn’t bode well for all of those youngsters getting MBA’s in Finance. With less financial riskiness assumed, there will be less volatility than expected, despite the fact that all my fellow CFA’s surveyed at the conference are expecting MORE volatility not less (if they all agree, they can only be wrong). Bottom line – the forecast for stock markets in developed countries can indeed be summarized as SUNNY with a chance of occasional thundershowers. Markets climb a wall of worry, and there’s sure an abundance of worry in the minds of the world’s leading minds.