Rosey's Outlook


by J.D. Rosendahl

Thursday, October 21, 2010

Smart People Talking Money: Jimmy Rogers

Jimmy Rogers has proven to be quite the contrarian.  He was early into commodities before the trend was established.  He has some very well thought out comments recently:  Bank Balance Sheets 'Full of Rotten Stuff': Jim Rogers

The Banking Sector:
The problems banks have with mortgages will take a long time to be solved and bank stocks are not attractive despite the recent drop in price following fears over problems with foreclosures, famous investor Jim Rogers told CNBC Wednesday.

A law firm has alleged failures by Countrywide Financial, which Bank of America (BofA) bought in 2008, to properly service loans that were part of certain mortgage-backed securities.

"Everybody was doing this, this is not just something that Countrywide and Bank of America were doing," Rogers, who started the Quantum Fund with George Soros in the 1970s, said. "And now (banks) have to pay the price, suffer the consequences."

Balance sheets at banks are "full of rotten stuff," they still need to sort out their "gigantic" problems and their stocks will be in a trading range over the next five to six years, Rogers predicted.

"Nobody knows what book value at BofA is, including BofA," he said.

"I have no interest in bank stocks these days," Rogers added. "Normally when a big bubble pops it takes years for stocks to come back again."


The US Dollar:

"Right now, all the surveys show that everybody is unbelievably bearish on the US dollar, including me," he said.

"Whenever you have everybody on the same side of the boat you'd better go to the other side, at least for a while."
China:
China's interest rate hike may have to do with the fact that the country is trying to deal with a property bubble - which has formed in coastal areas and big cities - by encouraging investors to save rather than buy assets, Rogers said.

"I'm not selling China by any stretch of the imagination … I'm not buying right now," he said. "I buy China when it collapses. It hasn't collapsed in the past couple of years."

"In China there is a real-estate bubble that's going to pop some day, but it's not going to bring down the whole Chinese economy," he predicted, adding that sectors like agriculture and tourism are likely to do well.

Protectionism and Currency Wars:
A G20upcoming meeting may help in solving the tensions over currencies and trade, which threaten the world economy, but if it does not the trends toward protectionism are very dangerous, Rogers said.

"I'm continuing to worry very much about currency wars, trade wars," he said. "Avoid the ones that print money and put your money into real assets. That's the way to protect yourself."

1)  Banking:  Absolutely, it's going to take a long time for banks like BofA to wash through the foreclosure nightmare of faulty or fraudulent paperwork and their liability and/or the repurchase of bonds.  It's also going to take 2-4 years to wash out all the existing and pending foreclosures that are coming their way.

October 5, 2010:  Here's Why House Prices Will Now Drop Another 20%



Still Wildly Over Priced:  Nationally, real estate is still over priced.




Lack of Demand:  Outside of tax gimmicks to stimulate temporary demand, demand remains very low.




Dead Cat Bounce:  The chart shows a small sideways increase in values.




No Traction on Employment:  Unemployment remains a core issue and shows no sign of improving.




Significant Financially Distressed Supply:   We still have a lot of financially distressed homes coming to the market in the future, and that will keep values suppressed.


1)  If we get a decline of 15-20%, which I agree will happen in the near future, we will see exponential growth in the number of home owners joining the upside down club.  Those new members will feed the pipeline of future foreclosures and keep bank balance sheet issues firmly in trend.

What I do not hear anything about is the secular trend coming of higher tax rates, and potentially higher rates on the back of a bond bubble implosion.  No one has factored this into real estate values yet.

We could easily see state taxes, retail sales taxes, and fees going higher to bring state and local government short falls back into balance.  We could also see much higher federal tax rates.  The combined state and federal tax rates could easily double..........EASILY!

Taxes going higher compresses net income, which compresses real estate affordability, thereby compressing demand for real estate and thereby reducing real estate values.  It's nothing more than a linear mathematical equation.  It's really that simple.

We could also see the bond bubble implode, maybe not near term but definitely in 3-5 years.  If values of bonds decline, yields go higher and so do mortgage rates.  Also making real estate less affordable just like higher taxes.

The Double Whammy:  I believe we will get them both at roughly the same time.  The impact on real estate will be devastating, values will eventually decline well past what's conceivable by most people. 

2)  In the near term, I also think the dollar is a ready for a bounce.  Everyone in a trade is a touch scary when profit taking occurs on a potential short squeeze, the dollar could rally.  That's not to say the secular trend of a lower dollar has been breached but a counter cyclically rally could occur at any moment.
3)  Protectionism and currency wars are just a matter of when.  Maybe not in the near term but as part of a greater trend in global deflation, these issues will spring to life as countries struggle to protect their own economies.  It's a natural phase of deflation.

Jimmy Rogers provides great insights and value oriented comments.

Hope all is well.

J.D. Rosendahl, Rosey