Question: I would like to start by asking you: A year ago Lehman was falling apart, and now the stock markets are at their best level since the beginning of 2009. What is your take on this?

Governments around the world have poured huge amounts of money into the financial system. Obviously the money has to go somewhere, and it’s been going into a financial asset. The economy is better in 2009 than it was in 2008 because in 2008 nobody spent any money on anything, rice or beans or soap. Now, this year, you eventually run out of rice and beans and soap, so you have to spend some money, and the governments are printing a lot of money. So, we are having a revival. Is it permanent? I don’t think that the problems are solved yet. But it’s certainly better than last year.

Question: What do you consider to be the biggest risk right now with respect to the financial markets?

I suspect that the biggest risk will be that you’re going to see some currency problems in the world sometime in the next year or two. There are many, many imbalances in the world, trade market and currency market, so you’re going to see some problems in the currency market sometime in the next year or two that will spill over into the financial markets. But who knows? You never know, the world’s in precarious shape right now.

Question: If we are looking at the Dow Jones, it’s hot as a pistol right now. How long will this work? Is this a situation that we could anticipate?

I don’t know. I’m not smart enough to know. You’re right, the markets are up, aligned in the last six months, because of all the money that’s been poured into things, whether it’s going to last another six days or six months, I don’t know. I’m not very good at this. My way to play has been through own commodities, and I own some foreign currencies. I have not bought any stocks in the U.S., in many parts of the world, in fact, for a couple of years, other than China. I did buy one stock in Australia today, but other than that I may have been playing my commodities and currencies in Chinese shares.

Question: Do you see a bigger decoupling of the larger emerging markets and the US going forward from now on. We’ve had this decoupling for a few months, because when the markets in the U.S. were falling, China was going higher.

Markets throughout history have not all moved together. That’s just not been the case. Sometimes you see some markets moving together, but even places such as Canada and the U.S., which are neighbors, they have huge differences. Markets depend on the fundamentals of the company, or the sector, or the country, and some countries have fine fundamentals right now and some don’t. If you’re in the business of producing raw materials or commodities, you’re doing fine these days, your stock market will probably do better than countries which do not have commodities.

Question: Coming back to the currency crisis, because we want to get this right to the crisis looming. What exactly do you mean? Is the dollar going to further fall off the cliff? Is the yen going to go crazy? What do you have in mind?

I wish I were that smart. We would be rich if I was smart enough to tell you the answer to that. I do expect the dollar to have serious problems over the next several years. It’s already making new lows this year as you probably know. The yen is making new highs for this year. I would suspect that those sorts of trends will continue. I ‘m not selling the dollar right now. You don’t have to sell anything when you’re low. I think there will probably be more currency problems now. The problems could start in Latvia, it could start in Argentina, it could start in Kazakhstan, it could start anywhere, these kinds of problems. And in fact they usually do start in smaller and more marginal currencies, when you start having currency problems. But ultimately it will spill over, and you will see some currencies going up a lot more than they should, and some going down a lot more than they should, and some people losing money, other people will be making money. The largest debtor nation in the history of the world is the United States. And the debts are getting bigger. They’re not getting better, they’re getting worse.

Question: So you’re not excluding overshooting and undershooting in terms of the currencies? But I wanted to ask you, because you said in February that the banking system in Central and Eastern Europe might be a mess, is it different now?

No. The banking system in Central and Eastern Europe is still a mess. I think you probably know that, you’re there. Many, many people have bigger mortgages in other currencies, such as the yen and the Swiss franc, and many of these people are continuing to suffer, and many banks have made big loans in Central and Eastern Europe. Unfortunately I don’t see those problems being solved at the moment.

Question: Do you expect this to become to a full problem in the near future or do you think there will be government intervention before anything happens?

There’s been government intervention in Eastern Europe. I don’t know what more they can do. Most Eastern European and Central European countries do not have a lot of extra money, as you know. They’re all pretty overstretched. If people start going bankrupt, I know that the governments in Central and Eastern Europe will jump in and save things. But remember, that could lead to worse problems too, because the Central European and Eastern European governments themselves are very overstretched and so, if they suddenly jump in and try to support the banks, then the currency market and even the stock market may panic. And how much money does Slovakia have to support itself? How much money does Bulgaria have to support itself, if they have to?

Question: As you very well know, the IMF came to town, to this very region, and sort of placed a shield over this region in the last six months or so. Do you think we could have managed without the IMF?

Well, I think you would have been better off managing without the IMF. Yes, sure, the IMF helped things look better for a while, but normally people are better off liquidating bad assets and starting over. But until you solve the basic problems and liquidate the bad assets and the bad debts, somebody has to face the debt market somewhere.

Question: Right now, the IMF in Eastern Europe is acting like a helicopter. They are throwing money, they are very flexible. Do you see any risks they are facing for getting their money back?

Sure, that’s what I mean. All of you people printing all this money, in history that has led to currency problems, it has also led to increasing prices. That is why I would suggest that commodities would be a good way… Let’s put it this way: Historically commodities have been a good way to protect yourself when the governments print a lot of money, and I suspect they will be in the future. I would not be buying most currencies where you see people printing huge amounts of money. I would rather be owning real assets, such as commodities, rather than paper money.

Question: Speaking of the commodities markets, we’ve seen oil rallying a lot, but it seems it can’t get through that 75-dollar level. Do you expect that the commodities markets have rebounded a little bit too soon? They’re not really supported by economics fundamentals or vice-versa?

You’re talking about the last few weeks or months. I don’t really look at markets. I ‘m not a short-term trader. I don’t pay any attention to the short term or even the medium term. Whatever success I’ve had is finding things that are cheap and then owning them for several years.

Question: Have you bought commodities at the low levels they’ve reached throughout 2008 and 2009?

As I said before, the way I’m planning is to buy more commodities, at the end of 2008 and during 2009. I haven’t bought any recently. If the world economy is going to recover, commodities will be the best place, because shortages are developing of everything, and the economy would get better, and if the world economy does not get better, commodities are still a good place to be, because everybody is printing so much money. And throughout history, if you print so much, price increases. So, I think that commodities are a good place to be, and this is why I am mainly playing with commodities rather than stocks.

You may say inflation is not a worry, but for me it is a worry, and I do know that prices continue to go up. I do know that the US government says prices are not going up. I know the English government says that, but everybody I know who buys products knows that prices are going up. Governments are lying about it. Certainly oil prices are down and energy prices are down, and so the governments are saying well since that energy prices are down, therefore we don’t have to worry, but the prices of everything else are going up. I mean, maybe your butler is doing your shopping, but for the rest of us, we know prices are going up.

Question: Mr. Rodgers, we’ve seen the FED has become an arm of the Treasury. They are printing huge amounts of money, as you have said. My question following the inflation issue: is hyper inflation just around the corner?

Well, I wish I was smart enough to tell you that. It probably isn’t, just because people like me expects it to just be around the corner, but as I’ve said, I am protecting myself by it. If the economy is better, we’re going to have serious inflation, which will be good for commodities and even if the economy doesn’t rise, we have all this money. And so I don’t know when the inflation is going to show up so that governments cannot lie about it anymore. But I know that’s how I’m protecting myself, and I hope to make a lot of money as well.

Question: You really don’t believe that the Federal Reserve will be proactive in taking some money out of the markets before it’s too late, before we reach that inflationary level?

The central bank in America and the UK, I cannot think of any central bank that’s gotten things right in the past ten or fifteen years. If you know one, please tell me. But virtually no central bank has gotten it right. I see no way that the American central bank can withdraw money, and solve the problem, because if they do start withdrawing money, interest rates are going to have to go a lot higher, and everybody’s taking on a lot more debt. So it’s just going to make the situation even worse. I know that they can do it. I know that they’ve said a lot of things in the past twenty years, all of which have been wrong. If you think they can do it, please tell us how they’re going to do it, because the numbers are staggering, and I don’t see any way they can do it.

Question: Do you maintain your gloomy outlook on the British pound?

Well, I sold my British pounds a year or two ago, and I do not own any. No, I would not buy. I mean, there’s some currencies I own, the British pound is not one of them.

Question: Mr. Rodgers, what is the wisest question to raise: how much money can I lose or how much money can I make?

The first question you should always ask is how much money can I lose. You should not take risk. You should cut your risk as low as possible, because you know the key to being a successful investor is losing as little as possible, and then take those profits, when you make profits, and do not take any losses. I mean it’s all well and good if I made, you know, thirty or forty percent a year, three or four years in a row, and then I loose, you know, thirty or forty or fifty percent the next year. I’m pretty back where I started. It hasn’t done me any good at all. So you have to be careful. Avoiding the losses is always one of the most important lessons, perhaps the most important lesson.

Question: You favor China, you favor the commodities market. In terms of the foreign exchange markets, what are the currencies you really like, other than perhaps the Chinese one.

Well, the Chinese currency is not that easy to buy, although I do buy it whenever I can. What would I buy today? I don’t know what I would buy today. I own the Yen and I own the Swiss franc. Those have been two of my major currency plays. Would I buy them right now? As I said before, the Yen is making its highest for the year. So no, I wouldn’t want to jump in on the Yen. The Swiss franc is near its highest of the year. I wouldn’t want to jump in. I don’t really know. Let’s see. Maybe the euro has more to go. I own the euro, but I wouldn’t jump in. At the moment, I guess maybe the Canadian dollar would be one of the better places to be. Maybe the Singapore dollar. The Australian dollar, maybe. These currencies have been pretty strong recently, and the dollar’s been down. As I’ve said, the dollar has been making new lows for the year lately, but those are some of the places where I do have money and where I might add, if I had to.

Question: Everyone seems to be pinning their hopes on China for the overall economic recovery. Isn’t there just a little bit of risk to this?

There’s more than just a little bit of risk. The Chinese economy, while they’re doing good things and they’re in better shape than most economies, it’s only one tenth of that of Europe and America combined. I mean, no matter how well things go in China, they cannot solve the world’s problems. It’s a tiny economy compared to Europe and America. They saved a lot of money for a rainy day. Now it’s rainy. Now they’re starting to spend some of that money they saved. But anybody who’s counting on China to save us should do more homework. They cannot save the world. They can help and save some sectors of the world. But they can’t save the world.

Question: We’ve seen that banks and financials have been the backbone of the market rally that started in March. Are the banks now in the "zombie banks" stage or are they phoenix banks?

No, I guess the ones you’re talking about are zombie banks. City Bank, Bank of America, they are nothing more than zombie banks. City Bank went from 60 US dollars to 1 US dollar. If it rallies to 3, things look great if you borrowed in one, but if you borrowed in 60 or 50 or 40 or 30 you’re still hurting very badly. Banks are not in good shape. They’ve had a lot of money pumped into them, but they’re no more than zombie banks, just like the Japanese banks were in the 1990s.

Question: Do you see this recent rally, since March 9, that we’ve seen in the global stock markets basically as a relief rally due to the fact that the world has avoided a financial collapse, or hasn’t avoided one?

As you know, many people went bankrupt in the past couple of years. Stocks peaked in October 2007. They went down for 20 months, until March 2009 so we’re having a big rally, a powerful rally, in fact. I don’t think it’s the end of the problems down the road. But remember, after 20 months of collapse, it’s normal to have a big rally, no matter the sector, or the security we’re talking about. It’s natural to have this. Some markets have rallied more than others, China almost doubled, as you know. China hit bottom several months before the Western markets did. There are still going to be problems in the next year or two, but you can’t put all markets together. Even in a year when stock markets go up, there’s always some company or some sector that goes down. Likewise, in any year that the market collapses, there’s always some stocks that go up. You have to talk about what is happening, you can’t talk about the whole market, it does not work that way.

Question: Are we in for a double dip in the US?

You mean whether the economy will get weaker then?

Question: Yes.

Yes. But it may not get weaker in 2010 or 2011. But sure. We’re going to have more economic problems in the United States.

Question: For building the crisis the governments were wrong, the rating agencies were wrong, the banks were wrong, the investors were wrong. What about now?

You’re absolutely right, they were all wrong before. In my view, they’re probably going to be wrong again. Mr. Bernanke, of the central bank in America, said recently that the worst is behind us and that the recovery has started, but will be slow. Mr. Bernanke has never ever been right about anything, certainly not in his 6 years in Washington, which means that the economy is even stronger than he realizes or that we are about to have more problems again. They are still wrong, most of the banks are paying bonuses again. But we are going to have more problems down the road. But these are zombie banks, they’ve been propped up, so even if they say that everything is ok, it’s not ok for many banks. But do not get me wrong. There are certainly sound banks in the world, and there are certainly people that are going to come out of this stronger than their competitors.

Question: But if Mr. Bernanke was wrong, how come the markets were cheering up when he was reappointed?

Because Mr. Bernanke has gotten the markets to go up for the last 4-5 months. The reason Mr. Bernanke got the job is because he’s bailed everybody out. Of course people were cheering for Mr Bernanke to get the job again, he bailed them out. Wouldn’t you? But is that going to be good down the road. No, absolutely not. The markets were cheering Mr. Greenspan once upon a time, now the markets know Mr. Greenspan was a disaster.

Question: The markets are also showing us that the Federal Reserve will move to increase interest rates sooner rather than later. Will this be a mistake right now?

I do not see any central bank in the world which is doing good things right now. Maybe Singapore’s central bank is doing better than most. Maybe the Canadian central bank. I’m just afraid that I don’t have as much confidence in what is going on in central banks at the moment. We’ve had three central banks in American history. The first two disappeared. In my view this one is going to disappear too because it continues to makes horrible mistakes. Between Mr. Greenspan and Mr Bernanke there is a pretty good chance that this American central bank will disappear too.

Question: Because G20 is coming up shortly, nothing has really been done in the last few years, in terms of regulation. Do you think there is really a need to do something in that respect.

The problems that have come up in the world in the past two-three years all come from industries which are very, very tightly regulated. Banking, mortgages, and insurance. These industries, certainly in the West, in the US and the UK, are among the most regulated industries in the nations. And that’s where the problems are. The problems didn’t come from people who were unregulated. You didn’t have any problems with people like that. So it’s not so much about regulation, it’s the regulators. We had a bunch of people who didn’t know what they were doing. The SEC [Security and Exchange Commission] in America visited Mr. Madoff six times in the past twelve years, and they didn’t even know what was going on. Six times they went there, and six times they couldn’t figure it out. It’s not the regulations, it’s the regulators, they don’t know what they’re doing. Alan Greenspan said that the rates were great, that this is wonderful, this is going to be good for the banks. Mr. Bernanke said as recently as two-three years ago: "Don’t worry. There are no problems with housing.” These guys didn’t know what they were doing. They did not know what they were doing then, and they do not know now. So giving more regulations to a bunch of incompetents is not going to solve the world’s problems.

Question: Mr. Rogers, you were criticizing recently, saying that the solution of too much debt and too much consumption was more debt and more consumption. What will be the viable solution?

Letting incompetent people and bankrupt people go bankrupt. Let the assets be taken over by competent people who can start the system over again. That’s the way the system is supposed to work. You’re supposed to let people who fail fail. You let competent people come in, take over the assets, reorganize them, and start over. There was a famous economist 100 years ago who said "capitalism is the process of creative destruction.” You have new people come in, they destroy old companies and old people, and the system starts over. Microsoft destroyed a lot of people in the technology business. But Microsoft has done a great thing to the world. Walmart destroyed many American retailers. On the other hand I do not think anyone would complain because Walmart has made it better for everybody. That’s the way the world works, or is supposed to work, anyway. You have new and competent people taking over, rising up, becoming new and dominant players, and putting the other ones out of business. The way Americans are doing now and the UK is trying to support the incompetent people, support the people who should be liquidated, and not making things worse for everybody because now the system is weakened, and we all have to support incompetent people and incompetent assets.

Question: In all honesty, Austrian economists seem to have it right in terms of the fact that artificial interest rates set too low lead to excessive credit creation, speculative bubbles, and very low, artificially low savings. Do you expect that we are at the beginning of a new credit bubble and obviously a new credit crisis in a few years?

The next bubble that I see developing is the United States government bond market, which is a credit market, needless to say. I cannot conceive that anybody would lend money to the United States government in US dollars for 30 years at 3,4, 5, or 6 percent interest. So that is a new bubble which is developing. I worry about it. I have not sold short United States government bonds, but I do hope I’m smart enough sometime in the next year or two to sell them short, because that will be one of the new bubbles.

Question: But won’t it be tricky, even close to impossible to unwind such a bubble on government bonds?

That’s why I want to short them. Because I do not see how they can unwind the problem. Interest rates in the US are very low, and they can go much lower, needless to say. One thing about bubbles is that they always go much higher than anyone would expect. It’s certainly higher than I would expect. But if and when, if interest rates go round like they did in Japan, it’s going to be almost impossible for people to unwind the situation, and you’re going to have a huge crack-up.

Question: Is the US government too big to fail?

No, of course not, governments have been failing for a few thousand years. I know people who would tell you that the US government is going to fall in the next year or two. I am not saying that because I have not done enough homework at the moment. But I know people who say it’s already getting close enough, and we should all be very concerned about it. But you can say it, the US government can say that it’s too big to fail, but there’s no such thing. The market is bigger than everybody, and nobody can defy the market forever.

Question: Obviously, at the center of the credit crisis were the rating agencies. You were talking about the governments and the central banks. What’s your thought on the rating agencies?

I haven’t paid attention to rating agencies for years. The people who are in those rating agencies are people fresh out of college, fresh out of university, who sit down, and all of a sudden they say X, Y, Z, and people believe them. I wouldn’t pay any attention to rating agencies now either.

Question: Another major player, not in the crisis itself, but in the outcome of this was the IMF, and you were quite critical with respect to the IMF. Have you changed your sentiments about them, because they say they are being much more flexible these days?

I’m glad to hear that. I hope they are, but so far, the history of the IMF, you can go back and read the IMF annual reports, you pick any year you want in the past 50-60 years and you will see that they have always been wrong. It is terribly embarrassing to read previous IMF annual reports. They are as bad as the central bank in the United States. Just look it up, you don’t have to listen to me. They’ve nearly always gotten it wrong, and they’re getting it wrong now too.

Question: Do you see in the foreseeable future that the banks that ran to the Fed to become bank holding companies might want to turn again into investment banks?

Well, if things get really good, of course they will, they’ll get confident, they’ll think everything is fine, and then they’ll say “Oh, we don’t need this crutch anymore” and then they will change their products, and I guess they probably can, but if they do, that will probably be the top.

Interview made by Victor Popa, Marius Dan and Radu Soviani – The Money Channel