By William Patalon III, MBA

Managing Editor

Money Morning/The Money Map Report

It was definitely a 'Tale of Two Markets' yesterday.

And despite that phrase's similarity to the Dickensian classic novel, it wasn't legendary author Charles Dickens who was dominating my thoughts as the market closed yesterday (Monday).

It was legendary Contrarian investor Jim Rogers.

Just look at the headlines of the day and you'll immediately see what I mean.

On the positive side of the "news ledger," on this first day of the new quarter, we had the Dow Jones Industrial Average soar to a new record high. And yet, on that very same day, headlines warned of two failed buyout deals, lousy financial reports from Citicorp and UBS, and a manufacturing report that fell short of forecasts even with a greenback that's at a limbo-like low.

The minute I spotted those incongruous and contradictory forces at work, I immediately thought of Rogers, and a somewhat combative, highly entertaining and extremely informative interview that the famed author and market commentator provided to Bloomberg TV a couple of weeks ago. In fact, the interview was taped on Monday, Sept. 17 – the day before U.S. Federal Reserve policymakers held a scheduled meeting and stunned the financial markets with a bigger-than-expected interest-rate cut of half a percentage point.

Speaking the day before Sept. 18 rate cut, Rogers warned that such a move would be nothing more than a gift bailout to a couple of hedge funds and some banks, and warned that the United States is on the road to inflation-fed financial ruin if the central bank doesn't get control of the money supply, and if we hem in the free-market forces that on their own will repeatedly rejuvenate capitalist markets.

(Jim) Rogers and Me

A little bit of background is needed here.

It was the summer of 1997, and I was in my fifth year on the Eastman Kodak Co. (EK) beat for Gannett Newspapers Inc. (GCI). Thanks to a big national scoop I'd enjoyed earlier that year, I found myself invited to a big Hewlett-Packard Co. (HPQ) press event in New York City. H-P was gunning for Kodak in the just-then-emerging consumer market for digital cameras, and was unveiling its new, low-priced line of "Photo Smart" digital cameras and printers to do so. I'd broken the story, and found myself suddenly on H-P's PR radar screen. After a trip to their headquarters in Silicon Valley that summer for some follow-up interviews, I ended up as one of the many journalists on their guest list for their glitzy unveiling late that summer.

But my New York trip had a dual purpose. My co-author and I had just put the finishing touches on the manuscript for our new book, Contrarian Investing, and we were meeting with publisher Prentice Hall to finalize some details.

One huge problem remained: We needed a prominent investor – preferably a well-known Contrarian – to write the "forward," the essay that readers perceive as a kind of tacit endorsement of the book.

Although the Prentice Hall folks and my co-author had tossed around a bunch of names, I already knew who I wanted: 'Adventure capitalist' Jim Rogers, the author of the best-selling book, Investment Biker, and a columnist, commentator and financial adventurer whose global-market insights were unique, captivating and – invariably – correct.

At the time, Jim was a regular guest on CNBC's hugely popular morning money program, "Squawk Box." I always tuned in when he was a guest. I'd read all his books, and I regularly clipped out and saved the columns he'd written for Worth magazine and other publications.

Rogers was born in Oct. 1942, and already had a list of impressive achievements before he was even 30 years old. By 1970, Rogers had earned degrees from Yale and Oxford, done a stint in the U.S. Army, and held several jobs on Wall Street. That year, he joined the firm of Arnhold & S. Bleichroeder, and met George Soros, the financier who today is usually always referred to by his full name: 'Billionaire Investor George Soros.'

The duo of Soros and Rogers soon formed The Quantum Fund, a hedge fund that's often described as the first truly global investment fund. Over the next decade, Quantum gained 4,200%, while the Standard & Poor's 500 Index climbed about 50%. Rogers "retired" in 1980, and since then has traveled the world (several times), written a series of business bestsellers, hosted several TV investment programs, and worked as a "guest professor" of finance at Columbia University's Graduate School of Business.

Since I'd been the one to suggest Rogers to our friends at Prentice Hall, I was assigned to track Rogers down and ask if he would write the forward for our book. Working from my hotel room during my short stay in New York, I somehow managed to find him, and even make an appointment to chat by phone. For some reason, we hit it off immediately.

As I've said before, it didn't hurt that I'd recently returned from an extended reporting trip to China, and that I'd actually invested in one of Rogers' emerging-markets stock recommendations, a Chinese poultry company that also manufactured motorcycles.

It also helped, I think, that I'd actually read so much of his work (and was actually able to recite the titles of a series of his articles, even naming the magazines in which they'd appeared). There was one magazine article I'd especially liked: It was the perfect Contrarian piece – "Sell Euphoria, Buy Panic."



Rogers was extremely gracious and gave me a surprising amount of time; he actually asked me a bit about my career and some of my goals. Even so – for me, at least – the conversation ended far too soon.

Maybe he wanted to help out a hungry young journalist. I'm sure that he remembered what it was like to have that first book coming out. And it definitely didn't hurt that I was a confirmed Contrarian. But Rogers ended up allowing us to adapt one of his essays for our book forward. And the essay we agreed upon couldn't have been any better suited to its task had it been specifically written for our book: It was a perfect representation of his view of the world, and it meshed just as well with the message my co-author and I had spent more than a year researching and writing to bring to light.

It's also the best piece of Contrarian investment advice an investor will ever get. It was that favorite essay of mine: "Sell Euphoria, Buy Panic."

The Toll Road to Trouble

So as I scrolled through the news after the markets closed yesterday afternoon, I couldn't help but think about Dickens, Rogers and that interview the famed author (Rogers, not Dickens) had given to Bloomberg TV back on Sept. 17.

The interview was classic Rogers: He was at times contentious, and refused to indulge unintelligent observations, but he was also courtly, and as always left investors with a lot of wisdom to live by – and to profit from.

His central message was a warning: The all-but-certain Fed rate cut (which ended up being even more certain than anyone realized) wouldn't be the panacea that everyone was predicting – at least not over the long term. It might well bring the best of times now, but there would be a cost – and the worst of times would later follow.

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With a greenback already so weak that it's nearing three-decade lows against other key currencies, and that insidious serpent – inflation – slithering its way back into our lives, the U.S. central bank should be raising interest rates, not cutting them, Rogers told the Bloomberg TV commentators.

"Other central banks are raising interest rates right now – the Norwegians recently raised interest rates, the Chinese recently raised interest rates," Rogers said, speaking from Shanghai, where he now lives. "There is inflation in the world. And inflation is going to get a whole lot worse. The U.S. dollar is going down dramatically, and the Fed is sitting around talking about trying to make interest rates a whole lot lower. That's going to cause inflation to go through the roof and it's going to cause the dollar to collapse. The Fed wasn't designed to bail out a bunch of hedge funds. The Fed was founded to make the quality of the dollar – the soundness of the dollar – very good for all of us. They are not here to bail out hedge funds."

Once again that "Best of Times/Worst of Times" theme came into play.

According to Rogers, it's those hedge funds – and the broader problems in the housing and finance sectors – that everyone is focusing on. But investors – and the Fed – are ignoring the big picture. While it's true there are some serious problems in this one part of the economy – mostly due to speculation fueled by an overabundance of easy credit that the Fed created – it's also true that that stocks are in record territory.

"Yes, maybe we're going into a recession, but it's not the end of the world," he said, adding that the Dow Jones Industrial Average is within 5% of its all-time high. "Where's this crisis you're talking about, except in a few hedge funds?"

It was almost like Rogers has been able to peer ahead in time about two weeks, because he described yesterday's market dichotomy perfectly. On one hand, the Dow Jones Industrial Average kicked off the new quarter by surging 191 points to eclipse the 14,000 mark and set an all-time record. On the other hand, several failed buyout deals, a lackluster manufacturing report and lousy quarterly reports from banking giants Citicorp and UBS reminded us all of the financial landmines that are still hidden ahead of us, in the darkness of uncertainty. [For a related story about yesterday's market developments in the stock and credit markets, please click here.]

Here again we see that "Best of Times/Worst of Times" theme holding true.

During the cable network interview two weeks ago, Rogers at one point called the Fed's brain trust "clowns" and a rate cut a "vote getter." And he reiterated over and over that the Fed's role is not to serve special interests, or to keep the free markets from operating.

Recessions are a normal element of capitalism – a purifying element, in fact. Downturns are way of washing the excesses out of the financial system, which makes the economy stronger so that it can resume its upward surge. But by constantly putting "Band Aids" on problem areas – and by stopping the free markets from operating as they should – the central bank and lawmakers in Washington are only putting off the inevitable, and making sure that when those problems finally do reach home, they'll be far bigger than they otherwise might have been.

"Let some people go bankrupt. That's what capitalism is," he said. "If you don't let people fail, that's not capitalism. The Russians tried that," and we all see where that got them.

Moves to Make Now

According to Rogers, investors shouldn't own dollar-denominated investments – especially currency or bonds – right now. He actually sold U.S. investment banks short some time ago. He also recently sold all his emerging markets investments, except for China, which he'd like to hold "forever."

He advocated investments in the Japanese Yen, the Chinese Renminbi (Yuan), the Swiss Franc, and perhaps other Asian currencies, too.

But there's one real long-term play to make here: Buy commodities, Rogers said. Stay away from wheat, which has soared nearly vertically in the past few months, and will likely consolidate, at some point. But Rogers likes most other agricultural commodities, specifically mentioning cotton, sugar and coffee. [For a related story on agricultural commodities – which includes some potential investment opportunities – please click here.]

Rogers has long been an major advocate of China – as both a great long-term investment, and as the world's next great country: In fact, he has a new book – A Bull in China: Investing Profitably in the World's Greatest Market – scheduled for publication in December.

Even so, Rogers warned that China could well be experiencing a stock-market bubble. The country is actively working to try and control growth and inflation, but the very inefficiency of its not-fully-formed capital markets may make that impossible.

Even so, given how the Fed is mismanaging the U.S. monetary system, Rogers said he'd rather have the Chinese central bank on his side than the U.S. Federal Reserve.

"They are doing their best," he said of the inflation-fighting efforts of China's central bank.

But even if that market bubble were to burst, it might not accurately reflect the soundness of the underlying China economy, which Rogers said remains quite strong. One thing, he said, may have nothing to do with the other.

In other words, should China's soaring stock market prove to be a bubble that bursts, it will certainly be the 'Worst of Times' for investors. But it will remain the 'Best of Times' for China's workers, who care little about how many vacation days they get when they start a new job there. Indeed, Rogers says that all they care about is how many days they can work.

If we look at that statement very closely, I believe that we've been given yet one more snippet of wisdom from one of the investing world's few true masters.

Staff Writer Mike Caggeso contributed to this report.

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