Jim Rogers: How the Federal Reserve Will Fail and the One Sector Every Investor Should Be In

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VANCOUVER, B.C. – The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae and Freddie Mac – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

Indeed, the U.S. financial debacle is now so ingrained – and a so-called "Super Crash" so likely – that most Americans alive today won't be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.

The end of this crisis "is a long way away," Rogers said. "In fact, it may not be in our lifetimes."

During a 40-minute interview during a wealth-management conference in this West Coast Canadian city last month, Rogers also said:

  • Why U.S. Federal Reserve Chairman Ben S. Bernanke should "resign".
  • How the U.S. national debt – the roughly $5 trillion held by the public – essentially doubled in the course of a single weekend.
  • That U.S. consumers and investors can expect much-higher interest rates – noting that if the Fed doesn't raise borrowing costs, market forces will make that happen.
  • Which stocks he's holding onto for the rest of the year

Rogers first made a name for himself with The Quantum Fund, a hedge fund that's often described as the first real global investment fund, which he and partner George Soros founded in 1970. Over the next decade, Quantum gained 4,200%, while the Standard & Poor's 500 Index climbed about 50%.

It was after Rogers "retired" in 1980 that the investing masses got to see him in action. Among his historic market calls, Rogers predicted China's meteoric growth a good decade before it became apparent and he subsequently foretold of the powerful updraft in global commodities prices that's fueled a year-long bull market in the agriculture, energy and mining sectors.

[Editor's note: Rogers recently released a new book, "A Bull in China," a page-turner that reveals what China stocks to buy... when to buy. To learn how you can get "A Bull in China" for free, please click here.] 

Rogers' candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Here are some of the highlights from the exclusive interview we had with the author and investor, who now makes his home in Singapore:

Keith Fitz-Gerald (Q): Looks like the financial train wreck we talked about earlier this year is happening.

Jim Rogers:There was a train wreck, yes.  Two or three – more than one, as you know.  [U.S. Federal Reserve Chairman Ben S.] Bernanke and his boys both came to the rescue.  Which is going to cover things up for a while.  And then I don't know how long the rally will last and then we'll be off to the races again.  Whether the rally lasts six days or six weeks, I don't know.  I wish I did know that sort of thing, but I never do.

(Q):What would Chairman Bernanke have to do to "get it right?" 

RogersResign.

(Q): Is there anything else that you think he could do that would be correct other than let these things fail?

Rogers:Well, at this stage, it doesn't seem like he can do it.  He could raise interest rates – which he should do, anyway. Somebody should.  The market's going to do it whether he does it or not, eventually.

The problem is that he's got all that garbage on his balance sheet now.  He has $400 billion of questionable assets owing to the feds on his balance sheet.  I mean, he could try to reverse that.  He could raise interest rates.  Yeah, that's what he could do.  That would help. It would cause a shock to the system, but if we don't have the shock now, the shock's going to be much worse later on.  Every shock, so far, has been worse than the last shock.  Bear-Stearns [now part of JP Morgan Chase & Co. (JPM)] was one thing and then it's Fannie Mae (FNM), you know, and now Freddie Mac (FRE). 

The next shock's going to be even bigger still.  So the shocks keep getting bigger because we kept propping things up and this has been going on at least since Long-Term Capital Management. They've been bailing everyone out and [former Fed Chairman Alan] Greenspan took interest rates down and then he took them down again after the "dot-com bubble" shock, so I guess Bernanke could try to start reversing some of this stuff. 

But he has to not just reverse it – he'd have to increase interest rates a lot to make up for it and that's not going to solve the problem either, because the basic problems are that America's got a horrible tax system, it's got litigation right, left, and center, it's got horrible education system, you know, and it's got many, many, many [other] problems that are going to take a while to resolve.  If he did at least turn things around – turn some of these policies around – we would have a sharp drop, but at least it would clean out some of the excesses and the system could turn around and start doing better. 

But this is academic – he's not going to do it. But again the best thing for him would be to abolish the Federal Reserve and resign.  That'll be the best solution.  Is he going to do that?  No, of course not.  He still thinks he knows what he's doing.

(Q):Earlier this year, when we talked in Singapore, you made the observation that the average American still doesn't know anything's wrong – that anything's happening. Is that still the case?

Rogers:Yes.

(Q):What would you tell the "Average Joe" in no-nonsense terms?

Rogers:I would say that for the last 200 years, America's elected politicians and scoundrels have built up $5 trillion in debt.  In the last few weekends, some un-elected officials added another $5 trillion to America's national debt.

Suddenly we're on the hook for another $5 trillion. There have been attempts to explain this to the public, about what's happening with the debt, and with the fact that America's situation is deteriorating in the world. 

I don't know why it doesn't sink in.  People have other things on their minds, or don't want to be bothered.  Too complicated, or whatever. 

I'm sure when the [British Empire] declined there were many people who rang the bell and said: "Guys, we're making too many mistakes here in the U.K."  And nobody listened until it was too late. 

When Spain was in decline, when Rome was in decline, I'm sure there were people who noticed that things were going wrong.

(Q):Many experts don't agree with – at the very least don't understand – the Fed's current strategies. How can our leaders think they're making the right choices? What do you think?

Rogers:Bernanke is a very-narrow-gauged guy.  He's spent his whole intellectual career studying the printing of money and we have now given him the keys to the printing presses. All he knows how to do is run them.

Bernanke was [on the record as saying] that there is no problem with housing in America.  There's no problem in housing finance.  I mean this was like in 2006 or 2005.

(Q):Right.

Rogers:He is the Federal Reserve and the Federal Reserve more than anybody is supposed to be regulating these [financial institutions], so they should have the inside scoop, if nothing else. 

 (Q):That's problematic. 

Rogers:  It's mind-boggling.  Here's a man who doesn't understand the market, who doesn't understand economics – basic economics.  His intellectual career's been spent on the narrow-gauge study of printing money. That's all he knows. 

Yes, he's got a PhD, which says economics on it, but economics can be one of 200 different narrow fields.  And his is printing money, which he's good at, we know.  We've learned that he's ready, willing and able to step in and bail out everybody. 

There's this worry [whenever you have a major financial institution that looks ready to fail] that, "Oh my God, we're going to go down, and if we go down, the whole system goes down." 
This is nothing new.  Whole systems have been taken down before.  We've had it happen plenty of times.

(Q):History is littered with failed financial institutions.

Rogers:I know.  It's not as though this is the first time it's ever happened.  But since [Chairman Bernanke's] whole career is about printing money and studying the Depression, he says: "Okay, got to print some more money.  Got to save the day."  And, of course, that's when he gets himself in deeper, because the first time you print it, you prop up Institution X, [but] then you got to worry about institution Y and Z.

(Q):And now we've got a dangerous precedent. 

Rogers:That's exactly right.  And when the next guy calls him up, he's going to bail him out, too.

(Q):What do you think [former Fed Chairman] Paul Volcker thinks about all this?

Rogers:Well, Volcker has said it's certainly beyond the scope of central banking, as he understands central banking.

(Q):That's pretty darn clear.

Rogers:Volcker's been very clear – very clear to me, anyway – about what he thinks of it, and Volcker was the last decent American central banker.  We've had couple in our history: Volcker and William McChesney Martin were two. 

You know, McChesney Martin was the guy who said the job of a good central banker was to take away the punchbowl when the party starts getting good. Now [the Fed] – when the party starts getting out of control – pours more moonshine in.  McChesney Martin would always pull the bowl away when people started getting a little giggly. Now the party's out of control. 

(Q):This could be the end of the Federal Reserve, which we talked about in Singapore. This would be the third failure – correct?

Rogers:Yes. We had two central banks that disappeared for whatever reason.  This one's going to disappear, too, I say.

(Q):Throughout your career you've had a much-fabled ability to spot unique points in history – inflection points, if you will. Points when, as you put it, somebody puts money in the corner at which you then simply pick up.

Rogers:That's the way to invest, as far as I'm concerned. 

(Q):So conceivably, history would show that the highest returns go to those who invest when there's blood in the streets, even if it's their own. 

Rogers:Right.

(Q):Is there a point in time or something you're looking for that will signal that the U.S. economy has reached the inflection point in this crisis?

Rogers:Well, yeah, but it's a long way away.  In fact, it may not be in our lifetimes. Of course I covered my shorts – my financial shorts.  Not all of them, but most of them last week.  
So, if you're talking about a temporary inflection point, we may have hit it.

If you look back at previous countries that have declined, you almost always see exchange controls – all sorts of controls – before failure. America is already doing some of that. America, for example, wouldn't let the Chinese buy the oil company, wouldn't let the [Dubai firm] buy the ports, et cetera.

But I'm really talking about full-fledged, all-out exchange controls.  That would certainly be a sign, but usually exchange controls are not the end of the story. Historically, they're somewhere during the decline.  Then the politicians bring in exchange controls and then things get worse from there before they bottom. 

Before World War II, Japan's yen was two to the dollar. After they lost the war, the yen was 500 to the dollar.  That's a collapse.  That was also a bottom.

These are not predictions for the U.S., but I'm just saying that things have to usually get pretty, pretty, pretty, pretty bad. 

It was similar in the United Kingdom. In 1918, the U.K. was the richest, most powerful country in the world.  It had just won the First World War, et cetera. By 1939, it had exchange controls and this is in just one generation.  And strict exchange controls.  They in fact made it an act of treason for people to use anything except the pound sterling in settling debts. 

(Q): Treason? Wow, I didn't know that.

Rogers:Yes…an act of treason.  It used to be that people could use anything they wanted as money.  Gold or other metals. Banks would issue their own currencies.  Anything.  You could even use other people's currencies. 

Things were so bad in the U.K. in the 1930s they made it an act of treason to use anything except sterling and then by '39 they had full-exchange controls.  And then, of course, they had the war and that disaster.  It was a disaster before the war.  The war just exacerbated the problems.  And by the mid-70s, the U.K. was bankrupt. They could not sell long-term government bonds.  Remember, this is a country that two generations or three generations before had been the richest most powerful country in the world. 

Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing.  And the U.K. suddenly had a huge balance-of-payment surplus. 

You know, even if Mother Teresa had come in [as prime minister] in '79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would've been great. 

You give me the largest oil field in the world and I'll show you a good time, too.  That's what happened.

(Q):What if Thatcher had never come to power?

Rogers:Who knows, because the U.K. was in such disastrous straits when she came in.  And that's why she came to power…because it was such a disaster.  I'm sure she would've made things better, but short of all that oil, the situation would've continued to decline. 

So it may not be in our lifetimes that we'll see the bottom, just given the U.K.'s history, for instance.

(Q):That's going to be terrifying for individual investors to think about.

Rogers:Yeah. But remember that America had such a magnificent and gigantic position of dominance that deterioration will take time. You know, you don't just change that in a decade or two.  It takes a lot of hard work by a lot of incompetent people to change the situation.  The U.K. situation I just explained…that decline was over 40 or 50 years, but they had so much money they could have continued to spiral downward for a long time. 

Even Zimbabwe, you know, took 10 or 15 years to really get going into it's collapse, but Robert Mugabe came into power in 1980 and, as recently as 1995, things still looked good for Zimbabwe. But now, of course, it's a major disaster. 

That's one of the advantages of Singapore. The place has an astonishing amount of wealth and only 4 million people.  So even if it started squandering it in 2008, which they may be, it's going to take them forever to do so.

(Q):Is there a specific signal that this is "over?"

Rogers:Sure…when our entire U.S. cabinet has Swiss bank accounts.  Linked inside bank accounts.  When that happens, we'll know we're getting close because they'll do it even after it's illegal – after America's put in the exchange controls.

(Q): They'll move their own money.

Rogers:Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.

(Q):We saw that in South Africa and other countries, for example, as people tried to get their money out.

Rogers:Everybody figures it out, eventually, including the politicians.  They say: "You know, others can't do this, but it's alright for us." Those days will come.  I guess when all the congressmen have foreign bank accounts, we'll be at the bottom. 

But we've got a long way to go, yet.

(Q): There's a lot of talk that the Chinese will use the Olympics to launch a new wave of nationalism and to move ahead. Are the Olympic Games as relevant as some people think?

Rogers:They've already got tremendous nationalism. But the international reactions about Tibet and the Olympic torchbearers re-awakened it.

And the politicians, of course, need it because they've got their own problems with inflation and overheating and [pollution and] the rest of it. So, like politicians throughout history, they fan it – do their best to say: Hell, it's not our problem. It's the evil farmers. It's the French. See that store over there: It's their fault. It's the Americans."

So that is happening, anyway. 
As far as the Olympics themselves, they're irrelevant.

America had the Olympics in ‘96 and it had no effect on the American economy – before or after. Some people in Atlanta were affected before and after. And some people who were involved with the Olympics were affected before and after.

America at that time had 270 million people. China's got five times as many people, and it's a much bigger country geographically.

Sydney, Australia had the 2000 Olympics. It had virtually no effect on the Sydney, or on the Australian economy – even though Australia had 18 million people. It's tiny … nothing. Yes, it had an effect on some people.

Greece, in 2004, had the Olympics. You haven't heard stories of a major collapse or a major revival of Greece in 2005, because the fact is that the Games didn't have much of an effect – not a noticeable effect, anyway. It had spot effects only, so I ignore the Olympics as far as the Chinese economy – and its stock market – is concerned.

(Q): Are you still bullish on China?

Rogers:Oh, yeah. I never sold anything in China. In fact, I bought more. I bought Chinese Airlines (CHAWF) last week. I flew one coming here. Maybe I made a mistake [with the investment], because it was emptier than I thought it would be.

(Q): Any thoughts why?

Rogers:One thing, you know, is that China's made it extremely difficult to get a visa right now. In the past, it's been hard to get a seat because Chinese airlines were so full. On this flight there were empty seats.

That brought home to me that they are cutting back enormously on visas right now. Discouraging travel, trying to clean the air, trying to protect against somebody blowing up the Forbidden City, et cetera. So the fact that planes are empty right now may be smarter than I thought.

Maybe I did get the bottom on the airlines, because if they are going to reissue the visas again, after all this, after September [after the Olympic Games have concluded], then the planes are going to fill up pretty quickly again. I would have picked the stock up at a bottom.

(Q):Yes.

Rogers:Anyway, I'm still around China. I have never sold any of my Chinese companies. You know, selling China in 2008 is like selling America in 1908. Sure, let's say the market goes down another 40% – so what! You look back over 100 years, you look back from the beauty of 1928, or even 1938 [in the depths of the Great Depression], and there is somebody who bought shares in 1908. He was still a lot better off having not sold in 1908.

[Editor's note: The Olympics were only a small window into China's economic potential. In fact, the Red Dragon is on the verge of handing investors the biggest profit opportunity in its 30-year growth explosion - one that's about to make the commodity boom look like an ant hill. "The New China Trader"reveals the dozens of Chinese companies set to be tomorrow's global leaders. Click here to learn more.]

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. nader paul kucinich gravel | September 6, 2008

    nader paul kucinich gravel
    mckinney ventura
    perot charts
    rage

    Got honesty?

  2. Sean Beecroft | September 7, 2008

    Woah, great article. Love to read Jim's thoughts any time.
    Always honest and always hitting close to the truth.
    Thanks for posting this article, it's a great read.

  3. Jay | September 7, 2008

    Check this out. One page summary please

  4. Tom | September 8, 2008

    Rogers is a wacko. So we let the whole system crash and send the country into a depression to punish Wall Street? How about citizens getting off their butts and forcing changes so it won't happen again. The average guy on the street doesn't even know what the Fed does. Listen to Warren Buffett, not this cynical jerk.

  5. Robert Stapelman | September 8, 2008

    Jim Rogers puts his money where his mouth is.I have been
    following his ideas for over 20 years now.He sees the big picture.He is generous in sharing his opinions with those that will listen. Thank you Mr Rogers.

  6. SteveO | September 8, 2008

    Rogers has a pretty narrow view himself… it's just China, China, and more China. This is getting old.

  7. Nick | September 8, 2008

    Tom the average Joe can't afford to pay attention. The system needs to learn a lesson and a fall would do that. A failed bank with bad buissness practices should fail thats how a self correcting market weeds out the incompetant.

  8. maggie | September 8, 2008

    Rogers like the rest always say the fall is way off in the future when they know better, they don't want to alarm people and be called bad guys and if they miss it then they will no longer be listened to.

    Rogers is playing it safe just like everyone else, but with Fannie and Freddie biting the dust as expected we are on the down slope and I'd get out of the way.

    Politicians private accounts and real money is out of the country if they are insiders. Keep in mind that the U.S. can keep you from bringing it back in or going to get it. The Swiss are liars and cheaters so don't trust them any further than you can throw Congress.

  9. Tom | September 8, 2008

    Nick, in a perfect world I agree with you. However, the U.S. is hooked on trillions of $ of foreign capital, much of it in debt of Fannie and Freddie. To let them go would cause a huge spike in interest rates and chaos in stocks, real estate and the general economy. The amount of money needed to then cure a depression would make this look like child's play. Like it or not, we march to the tune of our bankers, the Chinese, Japanese, Russians, Arabs, etc.

  10. Bob Purser | September 10, 2008

    Anytime I can read something Jim Rogers says or thinks. I will not hesitate to do so. Anyone taking shots at him is either misinformed, or ignorant to his simple, and easy savvy.

    Among investors, he is in a league almost alone, if not alone.

  11. Tom | September 10, 2008

    Put Rogers in as Fed president so he can let everything crash and burn. That's a real solution!

  12. Steve Bremner | September 10, 2008

    Jim Rogers commands respect because of his track record. Commenters who disparage him are voicing their own ignorance.

  13. Jim | September 10, 2008

    To Tom the Buffett Fan –

    Look at what Warren is doing now. He has one of his Bank Surety BH companies no longer insuring deposits (look up Kansas Bankers Surety Co.) above the amount guaranteed by the FDIC. Eleven banks have failed in 2008; seven of them since July 11. Maybe Mr. Buffett would agree with Rogers more today than ever.

  14. Indiana John | September 11, 2008

    We bail-out the failed at the expense of those who have not failed. The failed then graduate from failures to parasites.

    20 years ago Russia failed. You all know the rest.
    Write in; "Putin's Overcoat" on the ballot this year.

  15. roberto | September 18, 2008

    Rogers did not sell his Chinese stocks? Their market is down 80% since the October 2007 high.

    That makes no sense to me..

  16. Rudy | September 27, 2008

    Rodger predictions are coming faster then expected. So what would had happened if Fannie Mae and Freddie Mac went BK? I bet the other financial companies would know there is no govt. bailout and would simply raise interest rates and/or merge. But now there's a bailout plan with 700 billion up for grabs and now the financial institutions must "appear" to fail to get that cash.

  17. preston | October 1, 2008

    The problem with Rogers is he espouses arcane theory with myriad historical references, which are certainly educational and true. But he never really provides anything concrete, other than "buy China" of other sweeping generality about commodities, as if all commodities move in lockstep. Gold? Oil? Moving in opposite directions. China? Some stocks are gaining 100% while some lose 90%. He can basically claim to be right under any circumstance with this and other interviews.

  18. Erick | October 27, 2008

    Maggie said on Sep 8, "The Swiss are liars and cheaters so don’t trust them any further than you can throw Congress."

    Whatever. I suppose you meant something. Any specific bee up your bonnet?

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