Global investing icon Jim Rogers is shifting his sights from gold to sugar.

And with good reason.

Sugar prices have zoomed more than 80% since the start of the year – eclipsing the 21-cent-per-pound mark for the first time in 28 years. But Rogers says there’s more room to run: Even after its scorching advance this year, sugar remains 70% below the record peak it hit in 1974.

Given that kind of profit potential, Rogers is much more bullish on sugar than he is on gold.

“Sugar is still very depressed on any kind of historic basis and I suspect it will go higher,” he said recently. “I wouldn’t sell sugar. I don’t know if it is going to go up in the next week or the next month, but I am certainly expecting sugar to go much higher during the course of the bull market over the next several years.”

Not that he’s bearish on gold. It’s just that his ardor for the yellow metal has clearly cooled: "If it goes down I’ll buy some more, and if it goes up I’ll buy some more,” he said. “I periodically buy some gold. I don’t have a method to it. I just buy it."

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 then-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. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the more-recently-released “Bull in China.”

He’s also made some historic market calls. Rogers predicted China’s meteoric growth a good decade before it became apparent. And in early January 2008, he warned that the U.S. economy was headed for “one of the worst recessions” in decades, and counseled investors to shift into commodities since they were primed for a big upswing – two predictions that would have richly rewarded investors who took them to heart.
He reiterated those predictions – as well as several others – as part of two exclusive interviews that he granted to Money Morning Investment Director Keith Fitz-Gerald that April.

Rogers – the chairman of Rogers Holdings, and a man who shifted his home from New York to Singapore because of the global trends he follows – has now turned his attention to sugar. And he’s not alone.

Commerzbank AG (OTC: CRZBY) analyst Eugen Weinberg told Commodity Online that net long positions on sugar contracts traded on the ICE Futures exchange (NYSE: ICE) (formerly the New York Board of Trade) are running at four to five times their normal levels, totaling more than 200,000 metric tons. His take: Cash-rich hedge funds have developed a sweet tooth for the crystalline commodity.

“This situation hasn’t been observed in years,” Weinberg said in an interview. “I think we are seeing a combination of very important fundamental factors and the price being driven by speculative interest.”

And Michael Coleman, a Singapore-based manager of commodities hedge funds, told Bloomberg TV that sugar prices could soar an additional 80% – and could even eclipse the 40-cent-a-pound level.

After peaking at a recent high of 23.33 cents earlier this month, sugar closed yesterday at 21.79 cents a pound.

“Sugar is caught in a perfect storm," Coleman, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agriculture, told Bloomberg. “From this point on, it depends on how price affects demand."

Both those factors – price and demand – are worth a closer look.

Tight Supply Will Send Sugar Prices Higher

Sugar enjoys a reputation as a volatile commodity during the past 50 years, with a price that’s ranged from a low of three cents a pound to a high of about 60 cents.

From a price standpoint, sugar bulls say the natural sweetener is in a long-term uptrend.

If prices are to rise long-term, supplies will have to remain fairly tight as demand grows. The catalysts are in place for such a scenario to play out.

In the United States, the world’s largest economy, sugar supplies are tight and should get tighter. The U.S. Department of Agriculture (USDA) estimates that in the months to come, the supply of sugar will fall 43% from current levels, The Wall Street Journal reported.

Demand will continue to outrun the supply of sugar for a couple of years, says International Sugar Organization (ISO) economist Leonardo Bichara Rocha.

“This year’s deficit – the difference between supply and demand – is running at 7 to 8 million [metric] tons, and next year it will be between 4 and 5 million [metric] tons,” Rocha said in an interview with Commodity Online.

Weather problems in the nations of the world’s leading sugar producers – Brazil, India and China – are heavily to blame for the short supply. Heavy rains in Brazil have caused yields to drop, while in India a weak monsoon season has contributed to a production drop so massive that the country went from being a net exporter last year to a net importer this year, Reuters reported.

Nor are these easy problems to fix, experts say. Although Australia could boost production, China’s growing demand has been accompanied by a lack of investment in new production. That’s not surprising given that sugar requires a lot of land and water to grow – two things that are in short supply in China. Beside, entrepreneurs believe they can make much more by developing that land and putting a factory on it than they could by growing sugar cane.

The bottom line: It could take two years for sugar supplies to catch up to current levels of demand. And by that time, some powerful global forces could well be pushing sugar demand up to an entirely new level.

Global Trends Will Pump Up Worldwide Demand for Sugar

Although investors label sugar as a commodity, consumers view it as an “ingredient.” It literally goes in everything – except, maybe, for diet soda.

Consumption of sugar ranges from around three kilograms per person per year in Ethiopia to roughly 40 kilograms a person a year in Belgium. The basic rule of consumption about sugar is that per-capita consumption rises in concert with per-capita income, until the annual ratio reaches about 35 kilograms per person in middle-income countries.

In that respect, sugar prices may well soon have a gale-force tailwind pushing them higher. And that tailwind has a name.

It’s China.
China’s emerging middle class is already a major economic force. Estimates of its current size vary widely – ranging from 100 million to 247 million – but again it’s the long-term potential that’s key, Money Morning’s Fitz-Gerald said in a recent question-and-answer session with Executive Editor William Patalon III.
“One research paper predicts that China’s middle class could reach 600 million by 2015. That’s just five years from now,” Fitz-Gerald said. “To put this into perspective, consider this: The entire U.S. population is about 300 million. So we’re talking about a middle class alone that’s potentially twice the size of the entire U.S. market.”

The McKinsey Global Institute, the consulting firm’s independent economic research arm, projects that China’s middle class will increase from 43% of that country’s population today to 76% by 2025. At that point, China will be the world’s No. 3 consumer market.

China’s a big story, but it isn’t the only story – not even in Asia. India’s middle class will grow from 50 million now to about 583 million people in the next 20 years, an escalation that will transform that country into the world’s No. 5 consumer market, up from No. 12 today.

All told, the worldwide middle class will likely grow from 430 million in 2000 to 1.15 billion in 2030, the World Bank says.

Investors all too often focus on all the additional hamburgers, Cokes, baseball mitts or iPhones the world’s corporate elite will be able to sell.

But the biggest winners could be the commodities producers – especially those whose products (like sugar) go into products of all kinds.

Right now, in a prospering Asia alone “there are 3 billion people trying to have a better life and most people when they get more prosperous, use more sweets,” Rogers says.

On a global basis, the USDA estimates consumption will climb by 1.5 million tons in 2009-2010 from the previous year, BusinessWeek reported. And that’s just a start.

Progress brings with it new technologies – and new products – which combine to form another powerful global force that will contribute to that long-term tail wind behind sugar prices.

One such new product: Ethanol fuel, much of which is made from sugar cane. Brazil, the world’s largest producer of sugar, is diverting more than half of its sugar-cane crop to ethanol production. That compares to only one-third of the corn crop in the United States, where the ethanol market is still nascent, and where researchers are looking at “Cellulosic” alternatives for biofuel production.

So it’s no surprise that when Rogers sat down with Money Morning’s Fitz-Gerald last year, the iconic investor said he was bullish on two things: China and commodities. Late last year, Rogers and Australia’s Macquarie Funds Group teamed up to create an agricultural-commodities index that will help investors profit from shifting patterns of food consumption in the burgeoning market of Mainland China.

“I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture,” Rogers told Money Morning earlier this year. “You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating.”
The Macquarie and Rogers China Agriculture Index is an investable index that tracks price changes of the market “basket” of the agricultural commodities most commonly consumed in China. Macquarie Funds is the asset management arm of Australia’s Macquarie Group.

Six Possible Profit Plays

There are several ways that investors may capitalize on this bullish long-term outlook for sugar? They’re all worth a look.

• The “purest” sugar play – and also the shortest-term – is an investment in sugar futures, available on ICE in 112,000-pound contracts. The No. 11 contract trades global raw sugar, while the No. 16 contract trades the U.S. market, according to Commodity Online.
• Also futures Investors seeking an exchange-traded play on sugar can check out the futures-based iPath Dow Jones AIG Sugar Total Return Sub-Index (NYSE: SGG) Exchange-Traded Note (ETN). As of the close yesterday, this ETN had posted a year-to-date return of 62.1%.
• Although a bit more broadly based, the Deutsche Bank AG (DB) managed Power Shares DB Agricultural (NYSE: DBA) Exchange-Traded Fund (ETF) does include sugar as part (16%) of its holdings. Other holdings include soybeans (31%), wheat (28%) and corn (23%) – that last holding being a major near-term potential beneficiary if high sugar costs induce foodmakers to switch over to corn-based sweeteners. The fund is down about 3% so far this year.
• The ELEMENTS Rogers International Commodity Agriculture (NYSE: RJA) ETN, tracks 20 futures contracts worldwide. It’s down about 6% this year.
• In terms of pure agriculture-related investment plays, there’s the Van Eck Market Vectors Agribusiness ETF (MOO), a fund that really reflects the breadth of the agriculture sector, with holdings apportioned across such agricultural sub-sectors as chemicals, agri-product operations, equipment, livestock operations, and ethanol/bio-diesel. It’s up 39.2% so far this year.
• Although not a sugar play, per se, iff you believe that sugar-cane-based ethanol – and other sources of alternative energy – will be an inevitable part of the global future, consider the following “green” ETF: The PowerShares WilderHill Clean Energy Fund (NYSE: PBW), one of the better-quality funds that focus on “clean” technology as determined by the WilderHill Clean Energy Index. It’s up 17.2% this year.

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The Macquarie and Rogers China Agriculture Index is an investable index that will track price changes of the market “basket” of the agricultural commodities most commonly consumed in China. Macquarie Funds is the asset management arm of Australia’s Macquarie Group.

Macquarie actually created the product in November, and continued to operate it in December, when the China agricultural index posted a return of better than 11% – outperforming most agricultural indices and handily besting most stock markets in that part of the world, Asian Investor reported. That provided Macquarie Funds with the two-month performance needed to actually launch and start marketing the index.

“Apart from being the world’s most populous nation, China is [also] one of its fastest-growing and as such, Chinese dietary patterns should play an influential role in determining the prices at which agricultural produce is exchanged” Harry Krkalo, Macquarie Funds’ Singapore-based head of Asian retail funds sales, told Asian Investor. “Developing an investable index which effectively tracks the price changes of commodities with reference to the quantities of each agricultural product consumed in China is an innovative and exciting way to invest in the sector.”

Indices that track commodities are usually calculated utilizing so-called “supply-side” factors, and the commodity weightings are based on global production. The Macquarie and Rogers China Agriculture Index is unique because its component weightings are determined using current and projected data on commodities consumption in China.

The index allows investors to track – on a daily basis – the price changes of the agricultural commodities basket, and will ultimately enable investors to capture the price impact of current and potential changes in China’s food consumption patterns. What’s more, it also allows fund managers and other marketers of financial-services products to create and sell financial products that are linked to this innovative and topical theme. It uses exchange-traded futures contracts on physical commodities to do so.

The China agricultural index is the first one manufactured in Asia by Macquarie Funds, which is trying to use its geographic location to its advantage, and bolster its Asian presence. As of the end of September, Macquarie Funds had $53 billion in assets under management worldwide, including $1.5 billion sourced from investors in Asia.

“Macquarie is a leader in trading commodities futures. Jim Rogers has worked with other groups before but nothing specifically with China,” says Krkalo. “So when we put those bullet points down, a Chinese consumption-based product made sense and it is an interesting first index for us to roll out.”

From Investor to Icon

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. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the just-released “Bull in China.”

He also made some 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 fueled a year-long bull market in the agriculture, energy and mining sectors.

Rogers’ prescience is well known, and his candor and willingness to criticize the bailout strategies under way in Washington means that his comments almost always receive substantial media coverage.

Rogers sat down for extended conversations with Money Morning Investment Director Keith Fitz-Gerald twice in the past year. For the first of those two interviews, Fitz-Gerald traveled from his Oregon home all the way to Singapore, where Rogers now lives with his family. Rogers warned investors that there were tough times ahead for the U.S. dollar, and for the nation’s central bank.

In the second interview, Fitz-Gerald met with Rogers in Vancouver, British Columbia, where both were to speak at a major wealth management conference. During that April discussion, Rogers warned Money Morning readers that the U.S. financial crisis was destined to grow much worse – an assertion that echoed Fitz-Gerald’s own predictions and that’s also proved to be highly accurate.

In all his discussions, however, Rogers remains highly bullish on two things: China and commodities. The new index addresses both.

“I bought more [commodities] recently. I know that one of the few bull markets that I can see going up in the next five to 10 years is in agriculture,” Rogers said. “You may not have bull markets in cars or financial institutions or lots of other things, but I know the world is not going to stop eating.”

Roller-Coaster Ride for Commodity Prices

Commodity prices across the board have been whipsawed over the past two years. Food-and-energy prices soared in the last part of 2007 and continued their climb in the first part of 2008. In fact, as Money Morning reported in early April, food prices rose so far and so fast in the early part of last year that the leader of the United Nation’s World Food Programme warned that a “silent tsunami” of hunger was sweeping the globe.

But after the world commodities markets sold off sharply for most of the last half of last year, a committee made up of Rogers and key members of the treasury and commodities team in Macquarie Funds created the index.

“Macquarie is one of the largest traders of agricultural commodities globally and Jim Rogers is one of the world’s leading commodity investors so it’s a great partnership,” Matthew Long, Sydney-based executive director of Macquarie Funds, said in an interview with Asian Investor. “The index methodology is a refreshing way to approach investing in commodities and over time we believe that consumption patterns, particularly those of China, will increasingly influence agricultural prices. We expect the index to perform quite differently from existing agricultural indices.”

Macquarie Funds plans to launch, in the near future, a series of funds linked to the Macquarie and Rogers China Agriculture Index in the Asian region in addition to issuance in Switzerland, according to published reports.

“The investing public is still worried about where to put their money so any product launch for the next six months is going to be a carefully thought-out launch,” Krkalo says. “But this commodities index is interesting for both short-term and long-term reasons.”

In view of the projected demand for food over the next decade – especially with the emergence of the world’s largest middle class, taking place right now in China – the decline in food-based commodities was badly overdone, Macquarie’s Krkalo says. From a profit standpoint, the short-term opportunity stems from attractive valuations, while the long-run outlook is all about massive and growing global demand.

Krkalo and Rogers both make a strong case that everyone should be invested in commodities. Even with the big decline in prices that took place in the last half of last year, here in the U.S. market alone, for instance, prices for food in U.S. grocery stores jumped 6.6% last year – the biggest spike since 1980. If anything, that underscores yet again that inflation is a much bigger problem than government officials, or most economists, say it will be. It also calls into question the veracity of the statistics that say there was such a drop-off in prices.

Last year was the second one in a row in which U.S. consumers were forced to pay a lot more for their groceries, Money Morning reported. In 2007, food prices at supermarkets rose 5.6%. Prices rose only 1.4% in 2006.

Of all food categories, prices for cereal and baked goods hit U.S. consumers the hardest, zooming 11.7% in 2008 over 2007. Prices for meats, poultry, fish and eggs gained 5.1%. Fruits and vegetable rose 3.4%, while dairy products advanced 2.7%.

Asia’s Promise

Commodities indices actually outperformed stock markets in December, with the Dow Jones-AIG Agriculture Total Return Index and the Macquarie and Rogers China Agriculture Index posting returns of approximately 9.8% and 11.6% respectively, Asian Investor reported.

Most major Asian stock-market indices – including Japan’s Nikkei 225, Hong Kong’s Hang Seng, MSCI Singapore, Kospi 200 and the MSCI Taiwan – posted positive returns, the largest of which was the Kospi 200 with a performance of around 6.2%.

The worldwide financial crisis and the sell-off in stocks that’s resulted have singed the mutual-fund industry. Mutual-fund assets in Asia – excluding Japan – could drop by nearly 20% this year, and won’t equal last year’s record levels until 2010, Boston-based financial researcher Cerulli Associates reported back in October.

Assets in Asian funds soared 86% to $1.126 trillion in 2007, before dropping 12% in the first half of last year. Macquarie’s Krkalo told the China Daily that when markets improve, the region’s investors would scramble to find opportunities.

“Asian investors are really quick to move,” Krkalo said.

Asia’s fund industry is dominated by such heavyweights such as ING Groep NV (ADR: ING), Schroders PLC, JPMorgan Chase & Co.’s (JPM) JF Asset Management unit, and Prudential PLC, as well as Nomura Holdings Inc. (ADR: NMR) and Citigroup Inc.’s (C) Japan-based Nikko Asset Management unit, which the U.S. banking giant is trying to sell.

[Editor's Note: With the U.S. financial markets in tatters from the global credit crisis, Money Morning and its affiliated monthly newsletter, The Money Map Report, have trained their profit-seeking sights on markets outside U.S. borders. Of all those markets, one dwarfs all the others put together. And that's China. Investing icon Jim Rogers is such a believer in Asia's future, that he moved his entire family to Singapore, and counsels America's parents to make sure their children can speak Mandarin Chinese. That's not hyperbole, either. Back in 2008, when filmmaker Michael Covel traveled to Singapore to interview Rogers for his documentary, "Broke" The American Dream," the director said "it was amazing to see [Rogers'] 5-year-old, blue-eyed daughter speak Mandarin Chinese.”  Even under the weight of the financial crisis, China remains the fastest-growing market on the planet. And Rogers’ best-seller, “A Bull in China,” is like a profit playbook that will help you zero in on the Mainland China companies best poised to make you rich. In fact, check out our new report, which shows you how to get a free copy of this book. Just click here.]

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• Wikipedia:
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Ask investing icon Jim Rogers about the $700 billion U.S. banking bailout, and he’ll tell you that it’s nothing but “horrible economics.”
And with good reason: Most of the major U.S. banks are already bankrupt.

“Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,” Rogers said in a recent teleconference at the Reuters Investment Outlook 2009 Summit. “What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent. What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”

A long-time China bull, 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 first really got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the recently released “A Bull in China.” He also made some historic market calls: Rogers predicted China’s meteoric growth a good decade before
it became apparent to everyone else, 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.

Rogers’ candor has made him a popular figure with individual investors, meaning his pronouncements are always closely watched. Twice last year Rogers granted exclusive interviews to Money Morning Investment Director Keith Fitz-Gerald. In one of the interviews – carried each time as two-part series in Money Morning – Rogers correctly predicted that the U.S. financial crisis was destined to get much worse before any improvement was visible.

Goldman Sachs Group Inc. (GS) analysts last week estimated that banks worldwide have incurred $850 billion of credit-related losses and write-downs since the global credit crisis began last year.

But Rogers said sound U.S. lenders remain. He said these could include banks that don’t make or hold subprime mortgages, or which have high ratios of deposits to equity – “all the classic old ratios that most banks in America forgot or started ignoring because they were too old-fashioned.”

Many analysts have cited the Sept. 15 bankruptcy filing by Lehman Brothers Holdings Inc. (OTC: LEHMQ) as a trigger for the soon-to-follow cratering of the U.S. stock market and accompanying worsening of the U.S. economy.

But Rogers called that idea “laughable,” noting that banks have been failing for hundreds of years. And yet, he said policymakers aren’t doing enough to prevent another Lehman.

“Governments are making mistakes,” he said. “They’re saying to all the banks, you don’t have to tell us your situation. You can continue to use your balance sheet that is phony ” All these guys are bankrupt, they’re still worrying about their bonuses, they’re still trying to pay their dividends, and the whole system is weakened.”

[Editor's Note: Not many commentators can say that investing icon Jim Rogers granted them an exclusive interview. But Money Morning Investment Director Keith Fitz-Gerald can make that claim. Indeed, Fitz-Gerald interviewed the noted investor and author twice last year - once at Rogers' home in Singapore, and the second time at a financial conference in Vancouver. The stories that resulted were among the best read of last year in Money Morning. That says a lot about Fitz-Gerald's credibility. The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." But he brings more than a realization - and an understanding - to the table, here. After a decade of work, he's also developed a new computerized trading model based on a mathematical concept known as "fractals." This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and this new market environment.]

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Commodity prices have plunged from the record highs they hit earlier this year, but in a recent interview with Bloomberg, investing guru Jim Rogers said he is still bullish on commodities, which he expects to take off as soon as the clouds of the global recession lift.

The Reuters/Jefferies CRB Index of 19 commodities has fallen more than 54% from its July peak and is now at its lowest level in six years. Oil spearheaded the decline, with light, sweet crude for January delivery dropping $2.36, or 5.4%, to settle at $41.31 a barrel on the New York Mercantile Exchange Friday. Black gold has tumbled 71% since peaking at a record high of $147 a barrel in July.

Actual gold is down 27% from its record high of $1,032 an ounce, reached in March. Prices for other commodities such as copper, zinc, platinum and corn have shared in the decline as well.

“Everybody is just trying to get out of the markets,” Michael Aronstein, president of Marketfield Asset Management, told Bloomberg. “People are exiting as fast as they can.”

Everybody except Jim Rogers, that is.

“Commodities will be the place to be if and when we come out of” the recession, Rogers said an interview with Bloomberg. “The only thing where fundamentals are unimpaired are commodities.”

Rogers reasons that underinvestment will lead to a supply crunch in commodities that will send prices soaring.

“Farmers cannot get loans for fertilizer now. Nobody can get a loan to open a zinc mine,” he said. “So we are going to have some serious, serious supply problems before too much longer.”

In an interview with Money Morning earlier this year, Rogers pointed to a lack of investment and production in the energy sector as a main reason for oil’s run-up in price.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Now that the global recession has stomped down crude prices, oil companies no longer have the incentive or the funding to develop new sources. Earlier this year, for instance, ConocoPhilips (COP) and Saudi Arabian Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000-barrels-per-day (bpd) export refinery at the Yanbu Industrial City.

"We see and hear about energy investments being delayed… This is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before," Fatih Birol, the International Energy Agency’s (IEA) chief economist, told journalists in London last month.

The IEA says oil demand will rise 1.6% a year on average between 2006 and 2030. That means demand will rise from the current level of 85 million bpd to 106 million bpd.

To meet that demand, the agency estimates the world needs $26.3 trillion in supply-side investment over the next 21 years. About 7 million bpd of additional capacity needs to added to the market by 2015, the agency said.

Gold is another commodity that could make another record-breaking run.

Demand for the yellow metal actually increased by a record 45% from the second quarter to the third this year.

“I own some gold,” Rogers told Bloomberg. “And if gold goes down I’ll buy some more and if gold goes up I’ll buy some more. Gold during the course of the bull market, which has several more years to go, will go much higher.”

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• Money Morning:
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• Bloomberg:
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• Bloomberg:
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• Money Morning:
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Few analysts have abstained from voicing an opinion about the U.S. government’s plan to seize control of Fannie Mae (FNM) and Freddie Mac (FRE), the nation’s embattled mortgage behemoths, and that include such eminent investors as Jim Rogers and Warren Buffett. Of course, two of the world’s greatest financial analysts have very two very different perspectives.

"It is socialism for the rich," Rogers said yesterday (Monday) during an interview with CNBC Europe, "It’s just bailing out financial institutions."

The emergency plan announced Sunday by Treasury Secretary Henry Paulson has technically been branded "conservatorship," a term that implies the government will take its hands off Fannie and Freddie once they have been stabilized.

The CEOs of Fannie and Freddie, Daniel Mudd and Richard Syron respectively, will be removed immediately and replaced by former Merrill Lynch & Co. Inc. (MER) CEO Herb Allison, and David Moffett, formerly vice-chairman of US Bancorp (USB).

More importantly, though, the U.S. Treasury Department will purchase up to $100 million in special preferred securities. Current shareholders won’t be eliminated, but they will move to the back of the line for any future claims. The Treasury will also make secured loans to the companies if needed and even buy some mortgage-backed securities itself.

This is the biggest point of contention, as it puts taxpayer money at risk while at the same time boosting the value of Fannie and Freddie’s mortgage backed securities and bonds.

"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents," Rogers said. "I’m not quite sure why I or anybody else should be paying for this."

Fannie and Freddie will broaden their operations to support the shaky housing market until 2010. At that point, however, the two will be forced to unwind their portfolios by 10% a year, until they reach $250 billion, to reduce the risk to the taxpayer.

Though, according to Rogers that plan could backfire as well.

"That’s going to also ensure that house prices continue to go down. It’s going to be harder and harder to get a mortgage," Rogers told CNBC’s "Squawk Box Europe."

Of course, the Oracle of Omaha sees things differently. He praised the plan as a wise move for Treasury Secretary Paulson, who Buffett said "did exactly the right thing."

"I wouldn’t change anything in the plan myself," Buffett said in his own interview with CNBC. "It’s the best deal and the most sensible deal available now."

While he admitted the Treasury is officially "on the hook" for the depth of the housing downturn, Buffett argued that the government had no choice but to bail out Fannie and Freddie.

"Whatever they lose from this plan, if they hadn’t acted there were going to be greater losses down the road," Buffett said. He also pointed out that the arrangement between the two insurers and the Federal government, from the point of inception, is truly to blame for current troubles and nothing can be done now to erase that.

"They got into this position many, many decades ago when they got into, sort of, half-slave, half-free position where they said, ‘We don’t guarantee Freddie and Fannie’s obligations,’ and wink-wink.

"You can argue that there should have been some different rules put in decades ago in terms of what these companies have done, and it wouldn’t have come to this," Buffett went on, "but those rules weren’t put in by this Administration, or this Congress or this Treasury Secretary, and they face the problem of, in effect, $5 trillion plus of a combination of portfolio and insurance out there, and, really, chaos in the housing and mortgage markets."

News and Related Story Links:

• CNBC:
  Warren Buffett Tells CNBC Treasury "Did Exactly the Right Thing" on Fannie/Freddie

• CNBC:
  US Is "More Communist than China": Jim Rogers

• Money Morning:
  U.S. Government Takes Control of Ailing Mortgage Giants Fannie Mae and Freddie Mac

• Money Morning:
  Dueling Views on Housing: Jim Rogers Sees More Pain to Come While Warren Buffett’s Housing Expert Sees Rebound Under Way

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.

[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.]

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

VANCOUVER, B.C. – Despite its many problems, China remains such a strong long-term profit play that giving up on that country now would be like selling all your U.S. stocks at the start of the 1900s – before America created massive wealth by evolving into a world superpower, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

“I have never sold any of my Chinese companies,” Rogers said. “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.”

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

• The anti-travel policies China has put in place to reduce gridlock and slash pollution during the Summer Olympic Games may
  actually have created a “bottom” in China stocks – possibly creating a great entry point for long-term investors.
• The 34-day worldwide Olympic torch relay leading up to the opening ceremonies likely re-awakened China’s deeply felt nationalism – which will be key as that country strives to build demand for its domestically produced products.
• And noted that the country must still deal with such problems as pollution, rising inflation and an overheated economy.

A long-time China bull, 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 first really got to see him in action. Rogers traveled the world (several times), and penned such bestsellers as “Investment Biker” and the recently released “A Bull in China.” He also made some historic market calls: Rogers predicted China’s meteoric growth a good decade before
it became apparent to everyone else, 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.

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 regular home in Singapore:

Keith Fitz-Gerald (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?

Jim 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 (PINK: 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: After interviewing legendary investor Jim Rogers
at his home in Singapore back in March, Investment Director Keith Fitz-Gerald caught up with Rogers again in July - this time in Vancouver, where both were speaking at the Agora Wealth Symposium. In Part 1 of this two-part series, Rogers talked extensively about the ill-advised bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and the potentially ruinous fallout from the financial "Super Crash" that's about to engulf the U.S. market. In this second installment, Rogers emphasizes China's long-term profit promise - something he highlighted in his recent bestseller, "A Bull in China," which contains detailed research on dozens of China's top stocks. To find out how to get a report on the once-in-a-lifetime profit plays available in China - and how to also get a free copy of "A Bull in China" - please click here. Part 1 of this Money Morning interview with Jim Rogers ran yesterday (Tuesday).]

News and Related Story Links:

• Money Morning Exclusive Jim Rogers Interview From Vancouver (Part I):
  Exclusive Interview: Jim Rogers Predicts Bigger Financial Shocks Loom, Fueling a Malaise That May Last for Years.
  |
• Money Morning Exclusive Jim Rogers Interview From Singapore (Part I):
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.

• Money Morning Exclusive Interview From Singapore (Part II):
  Jim Rogers: China’s Economic Advance is All But Unstoppable

• Wikipedia:
  The Forbidden City.
• Official Web Site:
  Beijing Summer Olympics.
• Wikipedia:
  The Great Depression.

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 (FNM) and Freddie Mac (FRE) – 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 that:

• U.S. Federal Reserve Chairman Ben S. Bernanke should “resign” for the bailout deals he’s handed out as he’s tried to battle this credit crisis.
• That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled in the course of a single weekend because of the Fed-led credit crisis bailout deals.
• 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.
• And that the average American has no idea just how bad this financial crisis is going to get.

“The next shock is going to be bigger and bigger, still,” Rogers said. “The shocks keep getting bigger because we keep propping things up … [and] bailing everyone out.”

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. Rogers traveled the world (several times), and penned such bestsellers as "Investment Biker" and the recently released "A Bull in China." And he made some 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.

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.

[Editor’s note:  After interviewing legendary investor Jim Rogers at his home in Singapore back in March, Investment Director Keith Fitz-Gerald caught up with Rogers again in July – this time in Vancouver, where both were speaking at the Agora Wealth Symposium. Rogers talked extensively about the ill-advised bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and the potentially ruinous fallout from the financial “Super Crash” that’s about to engulf the U.S. market. To find out how to get a report on the once-in-a-lifetime profit plays that will emanate from this so-called "SuperCrash" – and to also get a free copy of noted market analyst Peter D. Schiff’s New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse" – please click here. And look for Part 2 of Money Morning’s latest interview with Jim Rogers tomorrow (Wednesday).]

News and Related Story Links:

• Money Morning Exclusive Jim Rogers Interview From Singapore (Part I):
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.

• Money Morning Exclusive Interview From Singapore (Part II):
  
  Jim Rogers: China’s Economic Advance is All But Unstoppable.

• Wikipedia:
  
  Long-Term Capital Management.

• CBS News:
  Dubai Firm Outlines Port Sales Plan.

• Wikipedia:
  
  The Dot-Com Bubble.

• The San Diego Union Tribune:
  Chinese Thwarted on Unocal Deal.

• Wikipedia:
  
  The Great Depression.

• Wikipedia:
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• Money Morning Financial Commentary:
  (Jimmy) Rogers and Me: The Latest Wisdom From a Global Investing Guru.

• Wikipedia:
  North Sea Oil.

• Wikipedia:
  U.S. Public Debt.

Standing on the steps of the U.S. Treasury building across the street from the White House, Treasury Secretary Henry Paulson asked Congress for the power to prop up Fannie Mae (FNM) and Freddie Mac (FRE), the two failing mortgage giants involved with nearly half of the $12 trillion U.S. mortgage market.

"The president has asked me to work with Congress to act on this plan immediately," Paulson said Sunday. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."

But half a world away – in his new home in Singapore – peripatetic investing guru Jim Rogers blasted the federal government for its new activist approach, which conflict with the very idea of a free market. A rescue of Fannie Mae and Freddie Mac – the second federally sponsored corporate bailout in four months after the Treasury Department rode to the rescue of The Bear Stearns Cos. Inc. (BSR) in March – is shifting the cost of errant financial strategies away from shareholders and onto U.S. taxpayers.

"I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae," Rogers, the best-selling author and famed investor told Bloomberg News. "These companies were going to go bankrupt if [the feds] hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made. What’s going to happen when you … put some Band-Aids on it for another year or two or three? What’s going to happen three years from now when the situation’s much, much, much worse?"

Clearly, a sweeping rescue of the government sponsored entities, such as the one planned, will bring with it a broad new range of liabilities for the American taxpayer, who will be financing institutions that are widely regarded as insolvent.

The debt securities issued by Fannie and Freddie are widely owned by pension funds, mutual funds, institutional investors, and even foreign governments. So a collapse of the two government-sponsored enterprises would send shockwaves through an economy that is already struggling to overcome the worst housing recession in a quarter-century, tight global credit markets and soaring inflation thanks to rising food and energy prices.

Paulson asked Congress for the authority to buy equity in – and lend to – the companies, while also substantially increasing their lines of credit.

The Treasury Department did not specify the amount of credit that would be made available to Fannie Mae and Freddie Mac, but those briefed on the plan told the International Herald Tribune that administration officials are lobbying Congress to extend the line of credit to $300 billion.

Each company currently has a $2.25 billion credit line that was established close to 40 years ago. At the time, Fannie Mae had only $15 billion in outstanding debt according to IHT.  Now, Fannie has a total debt of about $800 billion and Freddie has roughly $740 billion.

Many on Capitol Hill, particularly Senator Charles Schumer (D-NY), greeted the plan with enthusiasm.

"The Treasury’s plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," Schumer said.

"While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies, should it be needed."

But Rogers – who contends that the U.S. economy is in the midst of its worst recession since World War II – referred to Paulson’s plan as an "unmitigated disaster."

"They’re ruining what has been one of the greatest economies in the world," Rogers said, making a collective reference to both Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke.

 Said Rogers: Paulson and Bernanke "are bailing out their friends on Wall Street … but there are 300 million Americans that are going to have to pay for this."

[Editor's Note: For an insider's explanation of the catalysts for the Fannie Mae/Freddie Mac financial crisis - as well as the long-term fallout investors can expect - check out Contributing Editor Shah Gilani's " Inside Wall Street" column also contained in this issue of Money Morning. Global Investing guru Jim Rogers has been particularly critical of the U.S. government's willingness to bail out Wall Street's financial miscreants. Indeed, in an exclusive interview with Money Morning earlier this year, Rogers predicted the failure of the U.S. Federal Reserve for this very reason. And while that's very bad news for U.S.-focused investments, there is an alternative - Asia, and more specifically, China, Rogers says. For more details of this global investing game plan, and to obtain a free copy of Rogers' new bestseller, "A Bull in China," check out this investing report.]

News and Related Story Links:

• Bloomberg:
  Fannie Plan a ‘Disaster’ to Rogers; Goldman Says Sell.

• Money Morning Exclusive Interview:
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.
• International Herald Tribune:
  U.S. unveils vast plan to save mortgage giants.
• Money Morning:
  Freddie Mac and Fannie Mae Rocked by Liquidity Concerns

When asked about their outlook for the crisis-ridden U.S. housing and financial-services markets, two U.S. financial experts provided outlooks that completely contradicted one another – once again underscoring how tough it is for investors to predict when the U.S. economy will turn around.

Jim Rogers, a best-selling author who co-founded the famed Quantum Fund with George Soros back in 1970, told Bloomberg News Thursday that the global credit crisis caused by the subprime mortgage meltdown is nowhere near over.

"I doubt that we’re half way through the financial crisis," Rogers stated at a Barclays PLC (BCS) news conference Thursday in Singapore, where he now lives with his family. "We certainly haven’t hit the bottom as far as I’m concerned."

Not only did Rogers’ comments contradict those put forth this week by the heads of several Wall Street investment banks, they even ran counter to statements made by former partner Soros, who said this week that he believed the "acute phase" of the worldwide financial crisis was nearly done – meaning the U.S. economy might soon start displaying the benefits.

Rogers’ downbeat outlook also ran counter to some upbeat observations made by Ronald J. Peltier, the chairman and chief executive officer of investing guru Warren Buffet’s HomeServices of America Inc. real estate company, who told CNBC-TV that the beaten-up U.S. housing market has leveled out and is poised for a move to higher ground.

"I think the real truth is the market has been in a phase of correction," Peltier said Thursday morning during an interview on the popular financial cable channel. "We are seeing some light at the end of the tunnel."

So who’s correct?

Rogers, currently the chairman of Rogers Holdings and the author of the new investment bestseller, "A Bull in China," seems to think that’s a pretty easy question to answer. After all, big global securities firms and commercial banking enterprises have taken about $319 billion in write-downs since the start of 2007 and have slashed away 65,000 jobs in the past 10 months as the financial crisis spread across the globe, Bloomberg reported.

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Sign up right now, and we’ll send you an important new report for free: “The Three Best Investments in Asia.”

And there’s more to come.

"Most of the European banks and Asian banks haven’t taken a huge write-off yet," Rogers said. "I suspect there are more write-offs to come in Europe and Asia."

Echoing comments he made two months ago during an exclusive interview with Money Morning Investment Director Keith Fitz-Gerald, Rogers told listeners in Singapore Thursday that he’s avoiding financial stocks and is betting that the share prices of U.S. investment banks have a lot further to fall. He also sees continued major problems for U.S. homebuilders that very often doled out mortgages that did not require documentation regarding assets or income, and for government-sponsored mortgage financier Fannie Mae (FNM). That’s why he’s expecting housing stocks and Fannie Mae’s shares to decline even more than they already have as investors avoid all but the safest assets – such as U.S. Treasury debt.

Such ongoing uncertainty and fearfulness can’t help but cause overall stock-and-bond prices to fall even further, Rogers told reporters.

Indeed, during his recent exclusive interview with Money Morning’s Fitz-Gerald, Rogers said it’s even possible that the U.S. Federal Reserve could ultimately fail.

As if to defy his gloomy predictions, stocks have rallied since mid-March, when JPMorgan Chase & Co. (JPM), the No. 3 U.S. commercial bank, agreed to buy The Bear Stearns Cos. Inc. (BSC), in a central-bank-sponsored bailout deal. In fact, the MSCI World Index has gained 10% since touching a one-year low on March 17, Bloomberg reported.

While HomeServices’ Peltier agrees that was a problem – a "lot of people bought ahead of themselves," and speculators damaged the market even more – he told CNBC that he now believes the U.S. housing market has actually returned to its pre-boom times, with home sales running at an annual rate of about 5 million.

"I think that’s a normalized market and I think that’s a sustainable level," he told an interviewer. But he also divided the market into two distinct parts:

• The primary market of discretionary sellers.
• And the distressed market, which includes some of the regions that experienced the "meteoric" rise in housing prices – and which now are suffering the fallout.

Even after that, however, it’s clear that "housing prices are still within 8% to 10% of all-time highs," Peltier said. "The markets that have fallen off the most are actually the markets that were the most overheated."

As the housing market returns to its more-normal operation, Peltier believes stability will return and that prices and sales numbers will return to a point that was sustainable.

There is one wild card that has the executive concerned, however: Will the pressures of soaring fuel costs and a tight credit market put an inordinate amount of pressure on consumers who are attempting to work out their housing problem – as opposed to just walking away?

"A lot of people bought ahead of themselves," Peltier said in the interview. "Frankly, I think to some degree the lending industry, the mortgage business, lost its moral compass in terms of providing the proper credit standards and qualifications."

Speculators proved to be the real troublemakers: From 2001 to 2006, a full 25% of sales were made to buyers who believed they could turn a quick profit, and not to people who were planning to live in the houses and make them into a home.

In retrospect, Peltier said it’s clear the U.S. housing market got way ahead of itself from a price standpoint, with the flames of speculation getting fanned by unscrupulous appraisers and lenders who ended up putting lots of consumers into houses that they couldn’t afford.

Industry officials "knew it was an overheated market," Peltier said. "There were people for the first time ever having opportunity to buy part of the American dream under credit conditions and credit guidelines that were very, very shaky at best … And they were buying at the peak of the market with very low teaser rates, not fully understanding the implications of that adjustable-rate mortgage [re-setting at a much-higher rate] sometime in the future, and the probability that they could not afford that home under the new reset conditions. That’s a travesty, because there are a lot of people that got hurt."

He called on Congress to find a workable solution to the housing crisis, something that has been elusive as the legislators and President Bush spar over who should benefit from pending legislation.

On the broader political landscape, Peltier said the housing industry generally does better when Republicans are in office, though he did not endorse a specific candidate in the presidential race.

"There has been more showboating and discussion than actual rubber that meets the road," he said regarding the legislative impasse. "The fact of the matter is we really need to have some new legislation in place to slow down and stall the foreclosures where people basically bought into a home under mortgage financing programs they didn’t understand."

[Editor's Note: Just two months ago, Money Morning Investing Director Keith Fitz-Gerald's flew to Singapore for an exclusive interview with investing guru Jim Rogers. The two-part series that resulted is available here, free of charge. In Part 1, Jim Rogers predicted more pain for the U.S. dollar and the possible failure of the U.S. central bank. In Part II, Rogers talked about China's unstoppable economy. Please click on the book title to check out a new Money Morning offer that includes a free copy of Rogers' new bestseller, "A Bull in China."]

News and Related Story Notes:

• Bloomberg News:
  Jim Rogers Says Financial Crisis Hasn’t Hit Its Worst.

• CNBC.com:
  Buffett Real Estate CEO Sees Housing Comeback

• Money Morning Financial Analysis:
  The Baywatch Effect:Can China’s Growth Help Gold Prices Triple?

• Money Morning News:
  Soros: "We Have Not Yet Seen the Full Effect of Possible Recession."

• Money Morning Exclusive Interview with Jim Rogers (Part I):
  Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve.
• Money Morning Exclusive Interview With Jim Rogers (Part II): 
  Jim Rogers: China’s Economic Advance is All But Unstoppable.

• Money Morning News Analysis:
  Bear Stearns’ Friday Stumble, Sunday Sale Reignites Concerns About More Failures in U.S. Financial Sector.