Legendary investor and former partner of George Soros (Trades, Portfolio) and author of five investment books Jim Rogers recently appeared on Kitco News, where he discussed market opinions and actionable advice. You can watch the full video below.
The next bear market is going to be the worst in his lifetime, Rogers said. This means over a 50% correction.
This sounds rather dramatic but it doesn't mean the market will go down 50% in a day. Meanwhile the market is indeed at long-term valuations far above historical valuations.
According to GuruFocus data on the S&P 500 (SPY):
- Shiller P/E is 87% higher than the historical mean of 16.9.
- Implied future annual return: -2.6%.
- Historical low: 4.8.
- Historical high: 44.2.
- S&P 500: 2706.39.
- Regular P/E: 24 (historical mean: 16).
If we look at something like the "Buffet indicator," which is market cap to GDP, it shows a -50% bear market is well within the realm of historical possibilities. The market is currently valued at about 140% of GDP.
During the worst crisis mthe market has been valued around 40% of GDP. Unfortunately, GDP likely contracted quite a bit too during those periods. On the other hand, I'd say the market does deserve slightly higher multiples compared to what it deserved historically.
Kitco is a commodity website and, naturally, they were interested in Rogers' thoughts about gold. Somewhat interestingly, he's near-term bearish but long-term bullish.
Rogers said he believed, "When there is a lot of bad news and gold is not going up, it means gold isn't going up near term."
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Consequently Rogers continues to wait for a much better price to buy gold. He summarizes his advice as:
- Wait for gold to go down to buy it.
- Don't sell the gold you have.
Before we see the end of the terrible bear market, he sees gold going up.
I don't share a vision of higher gold but do buy into the idea that it is a good exposure to have in this unique monetary environment we are in. There's a great Charlie Munger (Trades, Portfolio) quote on the subject that expresses my feelings:
"You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly."
I don't think Charlie Munger (Trades, Portfolio) would ever recommend gold, at least not for civilized people, but I haven't been able to come up with a better solution. You could argue Berkshire stock but that doesn't always hold up very well either. I like gold as part of a cash equivalent solution.
Near term, Rogers expects the tax reforms to produce growth for a while. He doesn't see it producing a lasting effect while he has several major worries:
- Trump is looking for a trade war. (I don't agree with Rogers on this).
- Interest rates are going higher.
None of this is good for markets, at least not after a long bull run. In fact, as Warren Buffett (Trades, Portfolio) puts it, interest rates are gravity for stocks.
Disclosure: Author is long IAU (a gold ETF).
