By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

In the 20 years I’ve been creating stock-market forecasts, I’ve never seen such a contradictory set of forces at work in the markets all at one time. I could just as easily make the case that we’re finally nearing a bottom, as I could that we’re in for protracted downturn punctuated by sharp, quick drops.

The only question in my mind is what shape an eventual recovery will take, for I see three possibilities:

• A "U," with a slow, methodical reversal that gradually transitions into a market rebound.
• A "V," with a quick, sharp reversal that marks the start of a powerful rebound.
• Or a sideways "hockey stick," in which the downward trend ends sharply – but without the immediate upward surge in stock prices that would constitute a strong rebound.

My proprietary analysis and historical precedents both suggest the "hockey stick" is the most probable scenario. At a time when earnings are slowing and all sorts of red flags are flying, there are still too many unknowns to predict a U-shaped or V-shaped rebound.

Therefore, we believe investors will be best served filling their sails with the winds from the world’s most-powerful trends than they will be by trying to catch the intermittent gales. This is a market that will be dominated by large global trends – and the blue chips that follow them – particularly at a time when the so-called "economic cycle" doesn’t matter much.

Position Yourself to Profit

A properly structured and globally diversified portfolio using the 50-40-10 allocation model (50% "base-builder" foundation investments, 40% global growth and income plays and 10% "rocket rider" speculative investments that will perform well in a recovery) we recommend in The Money Map Report – our affiliated monthly investing newsletter – will prove to be an investor’s best friend. And the reasons for that are as simple as they are compelling:

• First, a properly structured portfolio has built in safety brakes that keep us from making overly risky decisions.
• And second, while this allocation model was constructed to minimize our downside in markets such as the one we’re navigating right now, it also positions us to benefit when the rebound eventually gets under way.

During the past year, we’ve repeatedly urged our readers to make sure two other elements are part of their portfolio: Dividend-paying stocks and specialized "inverse funds" that gain when the markets decline.

While dividends are important in any market, they’re downright crucial now because they add to returns during market rallies and help offset losses during market declines. And our commitment to inverse funds was rewarded during the whipsaw month of October: During a month in which the Standard & Poor’s 500 Index lost 16.8%, the Nasdaq Composite Index shed 16.3% and the Dow Jones Industrial Average dropped 13.9%, all 10 of the best-performing exchange-traded funds (ETFs) were inverse funds, which boasted one-month returns ranging from 36.4% to 66.6%.

Now those are admittedly remarkable returns – and clearly aren’t the norm. But it does demonstrate the point we’ve been making: It pays to protect your downside even as you position yourself for gains. And not only do such investments as inverse funds hedge our downside, they smooth out our overall portfolio volatility and help calm roiled waters.

On a more positive note, we’re now getting to the point where true value is finally being revealed, after years of "irrational exuberance."

But the reality is – and this is hardly new information for most investors – that global markets in general (and the U.S. stock market in particular) remain fragile, and we expect them to remain that way as long as policymakers continue to interfere with their ability to function freely.

Some readers will no doubt take issue with this, believing that the responses of the U.S. Federal Reserve and other central banks have been necessary. While we respect that opinion, we must also point out that the markets have a remarkable history of sorting out problems on their own – if left to their own devices. However, that’s a largely academic discussion that we’ll leave for another time because the government has already charted a course it believes is prudent.

Even if the world’s central bankers get their act together, the damage has largely been done. What’s more, the various bailout packages – especially the $700 billion U.S. banking bailout – while well intentioned, are almost certain to have more than a few unanticipated consequences.

Topics to Watch

The reality is that these bailout programs remain with us, meaning we must factor them into our efforts to scout out profit opportunities. And on that point, we see five primary areas of change and opportunity:   

• The U.S. Dollar: By pumping an estimated $3 trillion into the global financial system, the U.S. government is setting the stage for the mother of inflationary conflagrations. According to classic economic theory, the greenback should be in an actual freefall right now – especially in the current low-interest-rate environment, where there’s the potential for still more rate cuts and for additional capital outlays by the U.S. government. And that’s just with the current administration. President-elect Barack Obama has made it clear that if an additional stimulus isn’t announced before he takes office, he’ll make that one of his first official acts. What’s saving the dollar, at least for now, is that there’s so much global uncertainty that the dollar is retaining its reputation as a "safe-haven" currency. And, for now, at least, a safe U.S. dollar trumps inflationary concerns. However, should global investors regain confidence for whatever reason, expect the dollar to decline sharply.
• Oil: Many people are focused on declining oil prices as a function of a perceived slowdown in global demand. We think that’s an erroneous analysis for three key reasons. First, oil is still largely priced and traded in U.S. dollars. That means that as the dollar has risen, oil has become correspondingly cheaper. In other words, much of the price decline we’ve seen can simply be attributed to a rise in purchasing power associated with a stronger dollar. Second, China, India and other newly capitalist (and still-reasonably robust) economies are still increasing their oil consumption at a rate that more than offsets the decline in consumption we’re seeing here in the United States and in other developed markets. And third, Brazil aside, there hasn’t been a major new discovery capable of offset global demand on anything more than a temporary basis for more than 30 years, and most major oil fields are in decline or soon will be. Increasing demand and diminishing supply are clearly bullish influences over the longer term. More immediately, however, a stronger dollar negates this and may well keep oil under $100 a barrel for much of 2009. Obviously a terrorist attack would change the ballgame significantly, meaning we could see a spike to levels exceeding our multi-year target price of $225 a barrel. A year ago at this time, we called for oil to spike well up over $100 a barrel, and touch $150, which it essentially did. Even with recent price declines, some energy-industry insiders are starting to subscribe to our bullish outlook: The Paris-based International Energy Agency (IEA) last week projected that long-term oil prices would reach $200 a barrel (although we think that will happen much sooner than the IEA does).
• Commodities: The story is much the same for commodities, in general, and we expect that longer-term investors will be amply rewarded. More immediately, the popular – though erroneous – assumption that a global slowdown will negate demand is driving prices lower, and may continue to do so for the next six months. Gold will be the most obvious casualty in this arena, as hedge-fund-redemption requests and margin calls continue to mount, which is why we expect the price of the yellow metal to remain lower far longer than most people expect (We’ll focus specifically on gold in an upcoming installment of the "Outlook 2009" series). When it does rebound, however, the returns will be high.
• Global Markets: There’s no doubt that the global markets have taken their share of lumps along with their U.S. counterpart in recent months. But we don’t expect them to suffer forever. Countries with high cash reserves as a percentage of gross domestic product (GDP) – such as China, India and Brazil – are becoming less dependent on the fractured U.S. consumer almost daily, and the economic decoupling we’ve seen developing for several years may really take hold in the New Year. This stands in direct contrast to the situation a decade ago, when the Asian Rim and South America were economic train wrecks and the United States and Europe held all the cash. Companies with significant global exposure to the Asian Region, Latin America and Europe – in that order – remain the best bets for relative safety and growth in 2009.
• Stocks in General: Many investors are questioning the wisdom of being in stocks at all. While we certainly understand the pain that sentiment is based upon – and are hurting, too – it’s important to remember that the last time stocks really performed this badly was during the 1930s. Investors who decided to "get out" entirely then missed the investment opportunity of their lifetime. Don’t make the same mistake. Data shows, unequivocally, that investors who buy when the world is going to hell in a hand basket – think 1932, 1942, 1982 and 2003 – enjoy the largest returns. That’s even true if you’re "early," and buy ahead of the specific market bottom. However, history also demonstrates that investors who pile in at the market’s peaks – such as 1928, 1969, 1999 and 2007 — tend to incur the worst returns.
• Global Stocks in Particular: Led by cash-rich China, we expect global blue chips to remain the best relative bets for safety, income and appreciation potential in the New Year. We are especially focused on companies involved with infrastructure projects and with firms that derive substantial portions of their revenues from Asian consumers. The first is a no-brainer. According to the latest studies from a variety of sources, planned global infrastructure expenditures in this area exceed $40 trillion by 2030. There is not a bigger, more unstoppable trend on the planet today. If you want proof, notice that a big portion of China’s half-trillion-dollar stimulus package is devoted to infrastructure projects. Infrastructure companies there will certainly benefit. So will consumer-products firms that are positioned to benefit from the rise of an increasingly Asian consumer base, which boasts significant savings and pent-up demand. Many of the best companies are beaten down to the point that they now feature single-digital Price/Earnings (P/E) ratios – lower than we’ve seen in decades. Some are actually trading for less than cash value, despite a strong history of growth. And the companies we’re studying have solid cash flow – and excellent prospects of maintaining it. 

The $64,000 question – when could we see a rebound? 

We don’t know for sure. Nobody does. History demonstrates that the first and second years of any newly elected U.S. president’s term are almost always problematic. When taken in isolation, we could see a scenario where this is countermanded by President-elect Obama’s planned stimulus, but given the potent combination of flagging earnings and slowing U.S. growth, we’re leery of doing so.

On the other hand, for a variety of reasons, history also suggests that if we are to see a rebound, however nascent, the probability is highest for a resurgence starting in the middle of next year. First, since the 1970s, the time between the first and last market lows in any given bear market is an average of seven to eight months. If historical trends hold true, this suggests we could see a bottoming out by the middle of next year. That’s consistent and plausible, especially since other data shows U.S. recessions, on average, last 14.6 months – which also points to a bottoming out in late spring or early summer.

But the biggest indicator of all that we may see a bullish rebound in late spring or early summer – however slight – is admittedly based on emotion. Literally. Small investors have fled the stock markets in droves, and so far they’ve yanked more than $175 billion from the markets, with nearly 50% of that coming out during October alone. Granted, this is a mere 3.2% of the $5.5 trillion invested in stock market funds, according to Forbes, but it’s the first year that net equity flows have been negative since … a drum roll please … 2002.

History shows that small investors may be the most telling of all Contrarian indicators. According to TrimTabs, the Investment Company Institute and our own proprietary research, individual investors have a remarkable habit of rushing in near market tops and fleeing near market bottoms.

That means that long-term investors seeking the best wealth-building opportunities should find the immediate price declines we see ahead to be some of the most compelling buying opportunities of their investing lifetimes.

Now for the caveats – and you knew this was coming – we see three wildcards in 2009, and any one of them could prove to be a joker:

• The continued de-leveraging of hedge funds and other financial institutions.
• More credit-default-swap valuation problems.
• And unknowns associated with the ongoing U.S. and global-economic-system bailouts.

There are still huge questions regarding who owes what to whom, how large the debts are, and exactly who’s going to get what help and when. History shows that the most effective bailouts are those that recapitalize institutions and that allow the weak to fail, which is why we are especially leery of the U.S. government’s plan to acquire bad debt while rewarding weaker institutions that should be put out of their misery.
What’s more, many banks are using the government bailout money as takeover capital, and not to boost their lending, which at least would have had an expansionary benefit for the U.S. economy. With most of the bailout programs, and through no fault of their own, U.S. taxpayers and investors have been caught in the middle – or left on the sidelines altogether.

The Outlook 2009 Action Plan

For investors who want to get a head start, it’s important to bear in mind that the markets tend to begin their rebound in earnest anywhere from two months to six months before an actual economic bottom. While that doesn’t suggest going "whole hog" into stocks, it does speak to the need to take some steps now to get ready. Here are the top moves to make now:

• Rebalance Now: As markets have declined, many portfolios have done out of kilter, too – not only in terms of value, but in terms of balance. And that lack of balance can seriously dampen returns, even as we await the market recovery – and even more so once the market begins to rally. It’s far harder to catch a moving train than most investors think.
• Think Safety First: There’s no need to rush into the markets. It’s not clear we’ve hit bottom yet. Keep your powder dry for the better days and easier trades we see developing ahead, while bargain hunting for those stocks with true upside, and that are positioned to capitalize on the strongest global trends.

• Spread your buys over several days: When you’ve found something to buy, wait for a particularly bad day, then place your order in the last half an hour of trading. Leverage the lower prices (and maximize your returns) by spreading your purchases over several days or weeks. That way you won’t get tripped up by committing your entire nest egg when the market looks cheap and will probably get cheaper.

• Go Global: China is still on track for 9.6% growth this year and may, in fact, slow to a "mere" 8.0% next year. Even that reduced growth rate will probably be about eight times the growth rate of the U.S. economy – if we’re lucky. Consider adding exposure to the Asian Rim as part of the rebalancing process, or as a primary focus once the recovery begins in earnest.

• Get Inverted: Continue to use specialized inverse funds to hedge downside risk. We’re not out of the woods by a long shot.

• Stop Your Losses – with Stop Losses: By all means include trailing stops to control small losses before they become catastrophic ones. This market could easily fall further before it gives way to the rally that history suggests is in the making.

[Editor's Note: The multi-trillion-dollar financial crisis has created a "super crash" in the U.S. economy that's caused a lot of people to lose money. But you don't have to be one of them. Let Money Morning contributor and leading bear market strategist Peter Schiff show you exactly how and where to pick up the once-in-a-lifetime bargains the market's uncovering, and make 5 times your money over the next 6 months. Just click here to find out the details.]

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Experts expect dozens of banks to fail in the months to come.

But how can you tell if your bank could be one of them?

Ironically, if you look to the Federal Deposit Insurance Corp. (FDIC) for guidance – as most investors do right now – you won’t have a clue. That’s because its list of so-called “troubled institutions” is a closely guarded secret. The FDIC will tell you that 117 banks are currently on the list, up 30% from 90 at the end of the first quarter. And, in its desire to be ever so helpful, the agency also will tell you that the combined assets of troubled banks recently rose to $78 billion, a jump of 200% from only $26 billion at the close of the first quarter. Capital-loss provisions rose 240% to $50.2 billion.

But the FDIC won’t tell you – no matter how politely you ask – which institutions are most at risk (nor which are the healthiest) even though the government has this information at its fingertips. The FDIC says that it maintains this secrecy to prevent a run on troubled banks and enhance the overall stability of the banking community.

To me that seems an awful lot like asking investors to buy insurance after they’ve crashed their car.

So we’ve got to turn to other sources in an effort to protect our capital.

One of our favorites is the IRA Bank Industry Stress Index published by Los Angeles-based Institutional Risk Analytics. What makes the IRA Stress Index so compelling is that it’s based on the FDIC’s own data. That means it’s sort of like a financial X-ray that allows you to see what’s really under the hood – even though the government won’t tell you.

“Problems in the financial industry are of a scale that most people simply can’t imagine,” says IRA co-founder Christopher Whalen. “Existing ratings and research coverage are clearly inadequate.  That means we’ve got to come up with new ways to look at bank safety and soundness – particularly when it comes to increasing consumer awareness of transparency. And safety.”

Martin Hutchinson, a fellow editor at Money Morning and a 30-year veteran of the banking industry, agrees, noting that “knowledge, after all, is power. Particularly when consumers are caught in the middle like they are now.”

Although this financial intelligence originally was designed for institutions trying to make sense of the FDIC’s database, IRA recently created a personal report that allows individual investors to X-ray their own banks. Available for $50, the report classifies data into six broad categories at combine to create what IRA calls the “Key Safety and Soundness Indicators:”

• An overall “Stress Rating.”
• Return on Equity (ROE).
• Loan defaults.
• Capital.
• Lending capacity.
• Efficiency.

In contrast to other free services that simply provide a numerical grade or a star ranking without much in the way of helpful context, IRA provides an industry benchmark for each category so that investors can make “apples-to-apples” comparisons between banks. It also helps investors judge for themselves how risky any U.S. financial institution tracked by the FDIC actually is – or isn’t.

Whalen notes that the IRA model frequently provides early warnings, too. In the early months of 2006, for instance, he noted that the “Overall Industry Banking Stress Index began climbing at a time when most of Wall Street was in denial.”

Pointing to a sample report on Washington Mutual Inc. (OTC: WAMUQ), which he shared with Money Morning, Whalen said that, “in June 2008, just before Uncle Sam crashed WaMu’s party, the beleaguered bank had an Overall Stress Rating of 21.6 – versus an industry average of 1.4.”

In other words, according to IRA’s calculations, WaMu was more than 10 times riskier – which equates to more than a full order of magnitude – than the average bank. WaMu has since been purchased by JPMorgan Chase & Co. (JPM).

Obviously, WaMu is hardly alone. And it won’t be the last bank to fail.

According to Whalen, the IRA Overall Industry Banking Stress Index is still rising and as many as “110 banks with assets approaching $850 billion are likely to fail between July 2008 and next summer.”

But individual investors no longer have to fly blind, for they now have a tool to gauge whether or not their bank is likely to be on the FDIC’s “likely to fail” list.
To find out more, please click here.

Good investing,

By Keith Fitz-Gerald
Editor, Griger Index
Investment Director
Money Morning/The Money Map Report

News and Related Story Links:

• Money Morning Outlook 2009 Series:
  Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year.
• Money Morning News:
  JPMorgan Chase Biggest U.S. Bank With Its Purchase of Failed WaMu.
• Corporate Web Site:
  Institutional Risk Analytics.

Experts expect dozens of banks to fail in the months to come.

But how can you tell if your bank could be one of them?

Ironically, if you look to the Federal Deposit Insurance Corp. (FDIC) for guidance – as most investors do right now – you won’t have a clue. That’s because its list of so-called “troubled institutions” is a closely guarded secret. The FDIC will tell you that 117 banks are currently on the list, up 30% from 90 at the end of the first quarter. And, in its desire to be ever so helpful, the agency also will tell you that the combined assets of troubled banks recently rose to $78 billion, a jump of 200% from only $26 billion at the close of the first quarter. Capital-loss provisions rose 240% to $50.2 billion.

But the FDIC won’t tell you – no matter how politely you ask – which institutions are most at risk (nor which are the healthiest) even though the government has this information at its fingertips. The FDIC says that it maintains this secrecy to prevent a run on troubled banks and enhance the overall stability of the banking community.

To me that seems an awful lot like asking investors to buy insurance after they’ve crashed their car.

So we’ve got to turn to other sources in an effort to protect our capital.

One of our favorites is the IRA Bank Industry Stress Index published by Los Angeles-based Institutional Risk Analytics. What makes the IRA Stress Index so compelling is that it’s based on the FDIC’s own data. That means it’s sort of like a financial X-ray that allows you to see what’s really under the hood – even though the government won’t tell you.

“Problems in the financial industry are of a scale that most people simply can’t imagine,” says IRA co-founder Christopher Whalen. “Existing ratings and research coverage are clearly inadequate.  That means we’ve got to come up with new ways to look at bank safety and soundness – particularly when it comes to increasing consumer awareness of transparency. And safety.”

Martin Hutchinson, a fellow editor at Money Morning and a 30-year veteran of the banking industry, agrees, noting that “knowledge, after all, is power. Particularly when consumers are caught in the middle like they are now.”

Although this financial intelligence originally was designed for institutions trying to make sense of the FDIC’s database, IRA recently created a personal report that allows individual investors to X-ray their own banks. Available for $50, the report classifies data into six broad categories at combine to create what IRA calls the “Key Safety and Soundness Indicators:”

• An overall “Stress Rating.”
• Return on Equity (ROE).
• Loan defaults.
• Capital.
• Lending capacity.
• Efficiency.

In contrast to other free services that simply provide a numerical grade or a star ranking without much in the way of helpful context, IRA provides an industry benchmark for each category so that investors can make “apples-to-apples” comparisons between banks. It also helps investors judge for themselves how risky any U.S. financial institution tracked by the FDIC actually is – or isn’t.

Whalen notes that the IRA model frequently provides early warnings, too. In the early months of 2006, for instance, he noted that the “Overall Industry Banking Stress Index began climbing at a time when most of Wall Street was in denial.”

Pointing to a sample report on Washington Mutual Inc. (OTC: WAMUQ), which he shared with Money Morning, Whalen said that, “in June 2008, just before Uncle Sam crashed WaMu’s party, the beleaguered bank had an Overall Stress Rating of 21.6 – versus an industry average of 1.4.”

In other words, according to IRA’s calculations, WaMu was more than 10 times riskier – which equates to more than a full order of magnitude – than the average bank. WaMu has since been purchased by JPMorgan Chase & Co. (JPM).

Obviously, WaMu is hardly alone. And it won’t be the last bank to fail.

According to Whalen, the IRA Overall Industry Banking Stress Index is still rising and as many as “110 banks with assets approaching $850 billion are likely to fail between July 2008 and next summer.”

But individual investors no longer have to fly blind, for they now have a tool to gauge whether or not their bank is likely to be on the FDIC’s “likely to fail” list.
To find out more, please click here.

Good investing,

Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

[Editor's Note: Money Morning's annual economic outlook series is under way and promises to be much more detailed that last year's forecasting series. "Money Morning Outlook 2009" kicked off with Martin Hutchinson's in-depth look at the profit opportunities that could emanate from the projected new policies of President-elect Barack Obama. Next week, look for two more key installments in that series: A 2009 forecast for the U.S. stock market by Keith Fitz-Gerald, a former professional trade advisor who is now a well-known market commentator, and a forecast for the U.S. economy by R. Shah Gilani, a retired hedge fund manager who has emerged as a national expert on the U.S. credit crisis.]

News and Related Story Links:

• Money Morning Outlook 2009 Series:
  Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year.
• Money Morning News:
  JPMorgan Chase Biggest U.S. Bank With Its Purchase of Failed WaMu.
• Corporate Web Site:
  Institutional Risk Analytics.

Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

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?" 

Rogers: Resign.

(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.

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