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Why Jim Rogers Is Wrong About Hot Commodities

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Why Jim Rogers is Wrong by Chris, Capitalist Exploits

“If you’ve got young people who don’t know what to do, I’d urge them not to get MBAs, but to get agriculture degrees,” – Jim Rogers

“All your viewers who got MBAs made a terrible mistake; they should try to exchange them for farming degrees or mining degrees”. – Jim Rogers speaking to a Bloomberg anchor.

In 2004, Jim’s book Hot Commodities was published. In the book he focuses specifically on sugar and coffee due to favourable supply demand issues. Over the few years following publication both commodities rallied hard producing gains of 155% and 232% respectively.

We did not disagree and discussed Input Capital and their agricultural streaming model which we really liked and still do. We discussed opportunities for traders in “The Ag Trade” where Mark discussed specific trading strategies he was employing.

Over the last 10 years the returns have been admirable as you can see from the chart. That is provided you’d invested in 2005 and held on till today, and refrained from investing at any of the peaks in the respective commodities.

Looking out into the blue horizon I have to remain long term bullish on agricultural commodities. The solution to insufficient supply is higher prices, and as Rick Rule is fond of saying the solution to higher prices is higher prices. Higher prices will come due to insufficient supply on the back of rising demand from a rapidly developing middle class in emerging and frontier markets. In a recent article in the Economist I read the following statement.

“In the next 40 years humans will need to produce more food than they did in the previous 10,000 put together.”

Ok, so you’re wondering why or where Jim Rogers is wrong…

The answer to this lies in a story which begins with two distinctly different types of people: farmers and bankers.

Farmers do their clothes shopping at 1960s department stores, drive anything that has a space for a dog in the rear and dine on meat and 2 veg.

Bankers line the interior of their cars with 16 dead cows, polish off filet mignon and truffles – truffles being something most farmers I know would think is a game of some sort, not a food – and they dress themselves at Louis Vuitton.

Let’s take a look at the 2014 median farm household income forecast according the the USDA’s own website. Note that this is for the total household.

Median total farm household income is forecast to decrease slightly in 2014, to $70,564, down from $71,697 estimated for 2013.

Given the broad USDA definition of a farm, many farms are not profitable even in the best farm income years. The median farm income of -$1,626 is down slightly from the 2013 estimate of -$1,141.

Most farm households earn all of their income from off-farm sources—median off-farm income is projected to increase 3.7 percent in 2014 to $64,825.

Now let’s take a gander at our Brooks Brothers wearing friends.

Well, they’ve taken a hit. Poor Jamie Dimon CEO of JPMorgan Chase & Co has just received his first bonus in 3 years while his pay holds steady at $20 million. No really, feel free to read it on Bloomberg. Try not to throw up.

Goldman Sachs paid 121 of its London bankers an average of $4.7 million last year.

In case you think I’m cherry picking the top dogs consider the following pay scales for graduates.

  • 1st Year Analyst Total Compensation Range: $135K to $145K
  • 2nd Year Analyst Total Compensation Range: $155K to $170K
  • 3rd Year Analyst Total Compensation Range: $185K to $205K

…or the following chart:

Jim Rogers

The chart above shows how incredibly profitable this has been for those in the financial services industry.

Why is it then that bankers are making many, many multiples of what farmers are making?

The answer to this lies in how our financial system is rigged and something called the “Cantillon effect” named after Richard Cantillon.

In 1719 Richard Cantillon bought shares in John Law’s infamous Mississippi company. He noticed that the paper money being created by the government which was backed by shares in the company didn’t reach everyone in the economy at the same rate. Those who were well connected would receive it first and by the time it had filtered all the way down to the minions, typically the labouring classes, it had lost value.

The vast amounts of money and debt creation, QE1, QE2, Operation Twist, deficit spending, bail outs, bail ins, and every other absurd scheme dreamed up by central bankers all allow for those closest to benefit first and foremost. Every other participant in the market relies on the trickle down of this capital.

When you consider that banks create money by issuing debt and then charge interest on that debt then it is simply not mathematically possible for the rest of the participants in the economy to compete with that.

Those receiving lucrative government contacts for instance are close to the spigot. Consider, for example, at the heart of the death star a company such as Halliburton. It’s not lost on me that while Halliburton is ostensibly an oil company it profits repeatedly from wars waged by its directors and shareholders, using government funding for those wars.

When the US government decide to go to war against some newly fashioned enemy of the day they borrow by issuing debt. In borrowing they create money. That money goes directly to arms dealers, oil companies who are contracted in, logistics companies, and bankers putting the deals together. They receive that money, money created literally out of fresh air. How far away is the average farmer from this crony capitalism?

It doesn’t matter how money is created in this monetary chaos, whether it be via quantitative easing, deficit spending or bail outs. Banks are always sitting at the top of this house of cards.

Jim Rogers is right about one thing: agriculture will require large amounts of capital investment. But until we have a reset in the way the financial world operates bankers will continue to be the ones making all the money.

In the next post I’ll be speaking about an agriculture based economy which is largely devoid of bankers.

– Chris

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