Like today, for instance.

Everywhere I look, there is evidence that the American economy is in shambles. As investors, the cards are certainly stacked against us. At this point it even looks like the system may be rigged.

But we all know there is always a way out.

As a guide, there was a handful of times when I was positive the outcome would be grossly negative. Like the time a freak storm and its 70-mph winds decided to turn my boat into a submarine.

Or the time I sat in the back of 1958 deHavilland Beaver clinging to an outboard motor as the pilot dealt with the adverse gravitational effects of an overloaded plane caught in a mountainous downdraft?

Who knew an old floatplane could not climb and turn at the same time? We scared the hell out of the squirrels in our flight path.

Or how about the time an angry black bear nearly itched a scratch on my back? My colleagues have heard that story more than a few times.

And then there’s the trip that involved a naked Irishman, a bottle of expensive scotch, a broken canoe and a set of waterfalls called the “Devil’s Washboard.”

It’s no wonder my wife has a casket salesman on speed dial.

Beside the fact the naked Irishmen was a trader for a major hedge fund, these little “learning experiences” have little to do with investing.

Unless, that is, you believe the current market environment is the equivalent of being on the brink of death.

I happen to believe exactly that.

Look at the news today. I’d take my chances with a hungry bear than re-read today’s layoff headlines.

Thanks to its merger, Black & Decker is “trying” to keep its job cuts below 4,000. Nokia Siemens is axing 5,700 workers. Johnson & Johnson is cutting 7% of its workforce. Royal Bank of Scotland is cleansing its headcount by 3,700 workers.

While the markets bank on recovery, the facts are screaming something totally different.

The gold markets offer similar evidence of an impending fight for survival.

Thanks to word that India is the IMF’s mystery gold buyer (to the tune of $6.7 billion), gold prices made a massive stretch into record territory today.

India making a 200 metric ton purchase, there’s just over 200 tons left before countries looking to hedge their stack of greenbacks have to hit the volatile spot market.

You can bet Beijing is paying attention to the news. Gold prices will not stop climbing at $1,100 per ounce and it has some buying to do.

Finally, as if to kick us while we are down, Australia went ahead and raised its key lending rate by another 25 basis points.

Pretty soon, investors won’t have any choice but invest outside the States.

Fortunately, my time on the water and in the air helps proves, pardon the cliché, where there’s a will there’s a way.

The mere fact I have all my limbs and enough blood to keep my heart primed is testament to man’s ability to find a solution.

If you are reading this newsletter, you are already wise to many of the solutions necessary to overcome a ferocious bear like no other.

Do not hesitate to enact those measures.

Believe me, when the pilot yells, “brace, brace, brace,” it’s too late to find cover. You need to strap on the parachute before the squirrels are screaming.

*** Speaking of finding protection. How about a set of triple-digit gainers during a week when most investors were looking for a pillow to cry into?

That’s just what TFN Strategic Trader members were handed this week as the three plays I recommended to take advantage of the natural gas industry’s impending downfall soared in value.

Last I looked, the trades were good for gains of 228%, 177% and 33%.

It is not to late to get in on the action.

Get this little factoid: Year-over-year gas rig counts have been down by over 50% for six months, yet onshore production is down by just 0.5%. It proves we are getting too good at pumping natural gas from the ground. Now the industry is paying dearly.

As I write, natural gas is trading for $4.87 per MMBtu. It’s headed back to $2.50 real quick, real soon.

Read my full report and get in on the trades here.

*** Finally, keep an eye on that news from Warren Buffett today. He’s giving Burlington Northern investors a choice: take $100 cash for each share or trade them for shares of Berkshire Hathaway.

I’d take the cash and run.

If enough investors make the same move, it is a surefire sign of growing fears of a downturn. When Buffet gives the nod on a 50:1 split, you know a storm is brewing.

For me, it’s any port in a storm.

This has been a tough quarter for companies. Compared to last year’s second quarter, profit is down roughly 31 percent and revenue is down even more. Wall Street thought it was going to be even worse. So in one of the worst quarters ever, the market has rallied.

Investors learn all the wrong lessons from a rally like this. Nothing about it makes sense. The smallest companies are outgunning the biggest one. The most heavily shorted stocks are doing better than the least shorted stocks. The companies with the worst analyst ratings are outshining the ones with the best ratings. Everything about this rally is backwards.

Over the past 37 years – from 1972 to 2009 – these “best of breed” companies have made shareholders 2.3 times more money than the stock market as a whole. For every $100 you made from the stock market, you would have made $230 from these “best of breed” companies.

That’s not just slightly outperforming the market. That’s lapping the market and then some. And it’s even more impressive when you take into account everything this period covered. It’s been an eventful 37 years of embargoes, stagflation, a savings & loan crisis, an Asian economic crisis, a Russian national debt default, a near collapse of the Mexican peso, 9/11, two gulf wars, the bankruptcy of the Long-Term Capital Management hedge fund, the dotcom rise and fall, a bursting of the housing bubble, credit bubble and spending bubble. Forgive me if I’ve left some “minor stuff” out like the fall of the “Iron Curtain” and the rise of China.

Through all this, these companies gave their shareholders a steady and rising stream of revenue and a return that, as I’ve said, was more than 2.3 times what the markets gave. Who wouldn’t want that?

Everybody would. And that’s a big problem for all those mutual funds which don’t touch these companies … and for the hyper-active Wall Street press which makes a fuss over a dozen things every day but somehow misses the biggest story of all…

The existence of a class of companies which know how to put ever-increasing amounts of cash into the pockets of their shareholders, year in and year out, decade in and decade out.

Almost as bizarre as our junk rally are dividend-paying companies that can do no wrong. The ones strong enough and confident enough to raise dividends are going up in price. And the ones that are cutting dividends? Many of them are going up too.

Shareholders have recently been accepting smaller checks without protest and without selling their shares. They are evidently willing to take the hit today so the company can grow profits tomorrow. It’s easier to do when investors think that some kind of recovery is around the corner. If that recovery doesn’t materialize, these shareholders will be showing much less forgiveness to dividend cutters. I don’t want to own these companies when that happens.

If I were an investor in any of those companies, I’d sell my shares right away. The whole point of investing in the “best of breed” companies is that you get paid no matter what.

Everybody is cutting costs, the strong and weak companies alike. But not all dividend companies are cutting their dividends. Just slightly more than half are these days. It pays to invest in the dividend hikers, not so with the cutters. Let other investors be forced to rely on a recovery to reverse their portfolio losses.

You should be and can be making money even if the economy remains weak. As long as there are “best of breed” companies still raising their dividends, there’s no reason why you should sacrifice your pay “for the good of the company.”

The scary thing (for us and the Fed) is that low-interest rates aren’t speeding up the recovery. People aren’t willing to borrow. And banks aren’t willing to lend. The amount of money floating around the economy is pretty stagnant. The Fed should be pretty discouraged. They have $2 trillion on their balance sheet. And all they have to show for it are some banks which should have gone under but are instead giving its employees million-dollar bonuses.

Dividend companies are getting a little respect again. They may even have become the “new fad” according to the UK’s Telegraph. Here’s the money quote…

Few professional investors are banking on a return to the super-charged capital gains we have seen from equities in the past. Rather, the new fad is for companies capable of delivering reliable sources of income. Historically, dividends have been responsible for more than half the return on equities. In the more risk-averse environment which is the new norm it may be rather more than that.

But why be satisfied with just a “reliable source of income” when you could get income which is both reliable and growing. Perhaps the Telegraph doesn’t realize that with “best of breed” companies, you can have your cake and eat it too. But the Telegraph isn’t the only newspaper or media outlet that doesn’t “get it.”

Nobody is talking about these companies providing reliable revenue to shareholders for decades (yes, I said decades) and increasing their dividends at rates of 25-40 percent every year. Yes, I said 25-40 percent every year.

Do the math. A company raising its cash payments to you by 25 percent every year will double the money it pays you every three years! If you’re getting $10,000 in cash every year from a company now, in six years you’ll be getting $40,000.

These aren’t junk bonds. They’re not risky derivatives. They don’t depend on a bull market. These payments come from some of the safest and strongest companies in the market. When companies provide rising cash payments for decades and generate plenty of cash with above average profit margins, they qualify for “best of breed” status.

Actually, some people out there do “get it.” One of them is Hersh Cohen. He has managed the Legg Mason Partners Appreciation fund for the past 30 years. Over these three decades, his fund has done better than the S&P 500, the dividend-company benchmark index and the average return for large-capitalization stock funds. Cohen, who holds a doctorate in psychology, says he focuses on companies with “superior balance sheets and rising dividends.”

Cohen says his academic training helps him when the market goes to extremes. During such times he likes to go against the flow, cutting back when the market is euphoric and increasing his bets when others panic “and stuff is being given away.”

I’m not a fan of mutual funds. I think they’re terrible instruments, trapping investors into very narrow styles of investment long past the time when those styles made a buck. And I don’t think mutual fund managers are the sharpest tools in the investment shed. So when I see an exception, I try to point him out. Cohen is an exception.

If you’re interested in doubling your money every three years with very little risk, there’s only one way to do it. Invest in “best of breed” companies.

To your investing success,
Andrew

Source: Why ‘Best of Breed’ Investing Is No Passing Fad

Hedge fund legend Julian Robertson is betting the farm against long-dated US Treasurys. As Notes readers will be aware, we have been banging the drum on the vulnerability of long-dated US debt for over a month now. But Robertson, of Tiger Management fame, has a different way to make this short long-term Treasurys play (hat tip Market Folly).

Robertson is shorting long-dated US debt using something called a steepener swap play. Although the mechanism of this trade may be unfamiliar, at heart it’s a simple bet on inflation.

Robertson reckons inflation could easily hit 7% and that it could even reach 18%. Again, Notes readers will be familiar with this market script. This from eFinancialNews:

Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return.

Retail investors can make the same play as Robertson without using interest rate swaps. It’s actually very straightforward.

Robertson is betting on the yield curve steepening. This happens when the difference between the yields of short-term and long-term US Treasurys increases. Robertson is essentially short the price of long-term US Treasurys and long the price of short-term US Treasurys.

Anyone with a brokerage account can do this by buying the iShares Barclays 1-3 Year Treas.Bd ETF (NYSE: SHY) and shorting the iShares Barclays 7-10 Year Treas.Bd ETF (NYSE: IEF). This would give you a leveraged return on an inflationary future, which not only Robertson but also many other underground investors we know are betting on.

Robertson reckons China and Japan will stop buying US government debt as the dollar weakens. This would bring down the price of 10-year T-notes and cause the yield to shoot up.

Of course, the reason Robertson is so sure that inflation is on the horizon is the Fed’s quantitative easing ‘solution’ to the economic crisis, aka the printing money route, combined with the enormous pressure on US Treasurys right now.

I’m amazed at the amount of money the government is throwing at this thing. You don’t even react anymore unless somebody’s talking about $1 trillion. I genuinely admire the administration’s courage in doing what it’s doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it’s almost a bribe to get people to put on more leverage … I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved . I think what we’re doing now will either fail, or it will result in unbelievably high inflation – and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening.

Even the mainstream media has started to pick up on the threat of inflation. How can you hedge against it other than by shorting long-dated government debt? Here’s what the Wall Street Journal recommends:

1. A managed gold fund such as Tocqueville Gold (TGLDX) or US Global Investors World Precious Minerals (UNWPX). This is a lower-risk alternative to buying gold directly, since the metal itself can be volatile.

2. A mutual fund that bets on long-term interest rates rising. The two best known are the ProFunds Rising Rates Opportunity fund (RRPIX) and the Rydex Inverse Government Long Bond Strategy fund (RYJUX).

3. An absolute return fund that can use derivatives and aims to beat inflation. An example: MFS Diversified Target Return (DVRAX), which aims to beat inflation over 5% a year over a market cycle. The problem: there are no guarantees. Many of these funds are new. And the track record is too short to judge.

4. Refinance your house into a new 30-year fixed mortgage immediately. Rates currently average about 5.32%. If inflation surges, rates will too.

5. Sell long-term bonds. A bond guaranteeing 7% a year for 30 years won’t be worth much if inflation hits 10% and CDs start paying 11%. Treasury bonds have sold off sharply. But corporate bonds haven’t. The yield gap between long-term investment grade corporates and 30-year Treasurys, which was nearly 5% in mid-January, has fallen to 3.5%.

6. If you want guarantees, buy inflation-protected Treasury bonds (TIPS). Right now, the 20-year TIPS yield is about 2.4% over inflation.

Tyler Durden at Zero Hedge says:

John Hempton, who writes the insightful blog Bronte Capital, has done some amazing dot connecting in what, if true, and not swept promptly under the carpet by the powers that be, could expose a hedge fund scandal that could rival the Madoff fiasco, for the simple reason that it implicates none other than Barack Obama’s right hand man: Joe Biden. The fund in question is Paradigm Capital, a fund of funds, that is controlled by Hunter and James Biden, the VP’s son and brother, respectively.

This is an intricate story. And it is my no means conclusive. But Hempton has done a lot of good snoop work – enough to receive threats from lawyers. (As a former investigative journalist, I know that this is almost always a sign that a sensitive nerve has been touched. Subjects under investigation may as well wave a red flag with the letters “G.U.I.L.T.Y” embossed on it.)

According to Durden, the possible implications for James and Hunter Biden are as follows:

They were and remain controllers of a fund of funds which they allege misrepresented its returns and yet which they kept operational.

They were and remain controllers of a fund of funds which houses an alleged fraud in its offices (Ponta Negra).

They were and remain controllers of a fund of funds which employed a marketing organization (Onyx) which was associated with distributing alleged frauds (Ponta Negra and Stanford)

They were and remain controllers of a fund that claimed to have 28 staff many of whom are difficult to trace and where the revenue to fund those staff did not obviously exist. This suggests that either the staff were not paid, did not exist or (more sinisterly) they were paid by stealing from the small amount of funds under management. You could only steal the client money if the asset custody safeguards were not robust. There is an audit statement on the SEC files qualified as to the robustness of these protections – however there is no evidence that the lack of robustness was exploited.

“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.”

Jim Rogers: $700 Billion Banking Bailout is ‘Horrible Economics’

“Euro strength and dollar weakness further emerge in thin trading activity as geopolitical uncertainty creeps higher,” wrote Ashraf Laidi.

Investors were also fleeing to the historic safe haven of the Swiss franc and sterling was pounded, moving to a record low vs. the euro.

Looking ahead, “The dollar is really going to struggle,” said Scott Ainsbury, a portfolio manager with hedge fund FX Concepts Inc. “There are just so many dollars in the system with this liquidity, and flushing all the banks with money is going to kill the dollar.”

And Bloomberg reported that: “Home prices for the 20 largest metropolitan areas fell 17.9 percent in October from a year earlier, the biggest decline since record keeping began in 2001, according to economists in a Bloomberg survey before the S&P/Case-Shiller index is published today. The Institute for Supply Management’s December factory index dropped to 35.4, the lowest reading since 1982, a separate Bloomberg survey showed. The ISM report is due Jan. 2.”

Source: Dollar flat against euro But pound sinks to record low vs. common currency

There may have been some delayed reaction to the declining dollar and rising crude prices, or a correlation with equities markets which were off sharply (the Dow dipping briefly below 8000) before staging a late monster rally.

Analysts have no way of knowing just what they’re seeing.

Dale Doelling, chief market technician at Trends In Commodities said that “if this rally is able to sustain itself, the Dow should rally to at least the 9,500 level and I expect gold to be able to rally back above the $900 level.” But, “This is all dependent upon what happens tomorrow. If this ends up being a one-day event, all bets are off.”

There’s even a little guarded optimism out there.

“Markets, all of them, seem to be acting as if the hedge fund liquidation may have hit a cataclysmic bottom,” said Ned Schmidt, editor of the Value View Gold Report.

“With the Federal Reserve pumping funds as fast as they can, gold has extremely good fuel for a run higher [in] 2009,” Schmidt added.

But pessimist Dennis Gartman, editor of the Gartman Letter isn’t budging. “The gold market is telling us that deflation has ravaged the base metals, the soft commodities, the grains,” Gartman says, and also “telling us that depression is possible and even likely, and that deflation is the order for the day.”

Source: Gold, silver rocket up in after hours -  Surging equities help

This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States. What will happen?

I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: Who will be appointed the next attorney general of the U.S. (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?

A storyline is already emerging to the effect that these birds really didn’t quite know what they were doing in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday’s 60 Minutes broadcast). Nobody will buy that line of BS, though — and certainly not in the courtroom where, for instance, Mr. Hank Paulson will have to answer why his own firm of Goldman Sachs set up a special unit to short its own issues. It will be edifying to see how they answer.

In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford (NYSE:F) pickups, and eaten down the kitchen cupboard to a single box of Kellogg’s (NYSE:K)  All-Bran (which had been sitting there for eleven years infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?

It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to “do something!” Perhaps that will finally bring the troops home from Iraq — only for them to find that the Homeland has become Iraq….

If the financial system completes its self-destruction — and that’s looking more and more like a real possibility — there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in U.S. Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house.

That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation — in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into the system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless.

At some point, the government may have to summon up a new currency. I don’t think it will be anything like the “Amero” which the paranoid fringe incessantly mutters about as part of their fantasy in which the U.S., Mexico, and Canada all join up to become one country. But any “new dollar” would probably have to be backed by gold.

As we discover ourselves to be a much poorer nation, one of my correspondents put it: “the bogus risk-swapping economy must be replaced by a net value-added economy.” That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the global economy, but also competing with us for a dwindling supply of resources that are not equitably distributed around the world.

This means especially oil. I hope you’re enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead — not just more expensive, but literally not available. The current falling price of oil has little to do with the real supply and demand fundamentals. It’s simply a function of the markets being in near-total disarray. We’re running on current inventory, and running it down.

In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The “less-developed” nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum — in places like the deepwater Gulf of Mexico, Siberia, and Central Asia — are being shelved, which means the world has less of a chance to offset coming depletions in old fields.

The bottom line of all this is that we in the U.S. could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy — hamburger sales, theme park visits, NASCAR weekends — while it makes obvious the failures of our suburban living arrangements (and drives the value of housing there closer to zero).

My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it’s at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society capable of accomplishing something.

Source: Easthampton Burning?

With an economy that’s advancing at an average annual clip of better than 11%, $1.7 trillion in currency reserves, and an emerging middle class that will soon be the world’s largest, China represents the future to globally focused investors and businesses alike. But there’s always been a concern about just how resilient China’s economy actually would prove to be.

Rogers urged investors to dump such concerns.

In fact, according to Rogers, when it comes to the Red Dragon, only one thing could cause this powerful expansion to wash out: A major water crisis.

“China has a huge water problem,” he said. “In Northern China, they’re running out of water. They know this and they’re working on it, big time. But if they don’t solve it, or if they don’t solve it in time, then China – as you put it – has failed.”

Rogers first made a name for himself with The Quantum Fund, a hedge fund that’s often described as the first truly global investment vehicle, 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 public first really got to see him in action. After traveling the world on a motorcycle, Rogers penned the best seller “Investment Biker” – and gained the moniker: “Adventure Capitalist.” And he’s used the “on-the-ground” insights he gained on that trip and others that followed to make some truly historic market calls: Rogers predicted China’s meteoric growth a good decade before it became apparent to other investing “experts,” and he subsequently foretold of the powerful updraft in global commodities prices that is continuing to fuel a year-long bull market in the agriculture, energy and mining sectors.

In his newest best seller, “A Bull in China,” Rogers writes about China and the commodities boom, and details dozens of ways investors can profit from these trends.

Given Rogers’ prescience – not to mention all the uncertainty that right now surrounds the U.S. economy – we thought it was well worth a sit-down with the noted guru, even if it meant traveling all the way to Singapore, where he now lives with his family, to do so.

During that hour-long interview at his home in Singapore’s exclusive Orchard Park district – with the two of us talking as he pedaled his exercise bike furiously, despite the morning heat – Rogers also said that:

• Oil prices are only going to go higher.
• That Russia will continue to “strip itself” of assets, meaning it will never emerge as an economic force.
• And that the U.S. dollar’s woes will continue.

Let’s take a look at some of the highlights of the Money Morning interview with investor and author Jim Rogers.
Keith Fitz-Gerald (Q): Can you see an instance where China fails?

Jim Rogers: Of course. Anybody – and everything – can fail. But [let’s consider] the main problem first.

I don’t worry about war or epidemics or depression or even political upheaval. Everybody has had that. America had horrible problems. We had a terrible Civil War. We had political leaders regularly assassinated 125 years ago. We had massacres in the streets. We had no human rights. We had no rule of law. You could buy and sell congressmen. You can still buy and sell congressmen in America, but they were much cheaper in those days.

America had many disasters, and yet it became the great success story of the 20th Century. As recently as 1907, the entire system went bankrupt in America: The government, Wall Street, everything. And yet, America came out of that and went on to big things.

All of those things can happen in China and would be temporary setbacks. I don’t consider any of them being the end of the China story.

The only thing that worries me permanently about the China story is water.

I’ve been around the world twice. I’ve seen many cities, societies, [and] nations that disappeared because the water disappeared. China has a huge water problem. In Northern China, they’re running out of water. They know this and they’re working on it, big time. But if they don’t solve it, or if they don’t solve it in time, then China – as you put it – has failed.

By the way, Northern India has the same problem, only worse. Many places have it now. Water is becoming a huge problem worldwide. The same is true in the Southwestern United States. You know, you may have Arizona going to war with California. Some sections of Nevada, Colorado …they’re desperate there.

So it’s not just China – but water’s the main thing that worries me about China.

As I say [that] civil war would be a terrible thing in China, but it’d be a temporary setback, as would epidemics, as would economic setbacks, [and as would a] depression. But China will come out of all that and keep going forward. Now, I don’t anticipate war in China – even civil war – but I’m suggesting that if it happened, I don’t see it as the end of the story any more than it was the end of the story in the United States.

Q: There’s a confluence of money flowing into and around China. Do you believe that the United States, with all its current problems, will get left out of this powerful and important trend?

Rogers: Absolutely.

The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!

The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.

Q: Is the Chinese Renminbi the next great “liquidity haven” if the U.S. dollar fails? Or do you see the Euro rising to the occasion?

Now, at the age of 77 Soros is making the rounds to promote his new book, “The New Paradigm for Financial Markets,” which goes on sale next month. And while he travels the media circuit he’s taking the opportunity to speak his mind on the country’s current financial crisis, which Soros considers the “biggest financial crisis” of his lifetime. Last week, he echoed the International Monetary Fund’s estimate of more than $1 trillion in losses linked to the collapse of mortgage-backed securities. However, Soros pointed out that losses so far disclosed by financial institutions are related only to the decline in value of those financial instruments.

“I think it’s a pretty accurate estimate of the loan losses,” Soros said during a conference call with reporters. “But we have not yet seen the full effect of possible recession. It only relates to the decline in the value of the various financial instruments which are held by the banks and other institutions.”

They don’t “in any way reflect possible decline in the quality of loans that they hold. These are the eventual losses yet to be seen,” he added.

Almost 50 of the world’s biggest banks have recorded a combined $232 billion in asset write-downs and credit losses since the beginning of 2007, according to Bloomberg data.

Soros described the $45 trillion market in credit swaps – which gives investors the opportunity to place bets on the likelihood that companies will default on bond payments – as the “Sword of Damocles.”

“This $45 trillion market is unregulated,” he said. “That’s more than five times the entire government bond market of the United States. It’s almost equal to the entire household wealth of the United States.”

As far as accountability is concerned, Soros blames regulators and the current U.S. administration, which he says “failed to perform their job.”

“This is a man-made crisis and it’s made by this false belief that markets correct their own excesses,” he said. “It will take much longer for the full effect of the decline in the housing market to be felt.”

He continued: “I think the situation is more serious than the authorities admit or recognize. They claim that there will be a pickup in the second half of the year. I cannot believe that.”