'It's going to be much  worse' Famed investor Jim Rogers sees  hard times ahead for the United  States - and a big opportunity  looming in China.  Jan. 31, 2008

By Brian O'Keefe, senior editor

Famed investor Jim Rogers sees  hard times ahead for the United  States - and a big opportunity  looming in China. By Brian O'Keefe, senior editor NEW YORK (Fortune) -- You might expect Jim Rogers to be gloating a little bit. After all, the  famed investor has been predicting a recession in the U.S. economy for months and shorting  the shares of now-tanking Wall Street investment banks for even longer. And with fears of a  recession sparking both a worldwide market sell-off and emergency action from Federal  Reserve chairman Ben Bernanke, Rogers again looks prescient - just as he has over the past  few years as the China-driven commodities boom he predicted almost a decade ago began  kicked into high gear. But when I reached him by phone in Singapore the other day there was  little hint of celebration in his voice. Instead, he took a serious tone.

"I'm extremely worried," he says. "I have been for a while, but I just see things getting much  worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's  decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate  only a week before its scheduled meeting (at which time they cut it another 50 basis points) is  the latest sign that the central bank isn't willing to provide the fiscal discipline that he thinks  the economy desperately needs

Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but  I'm afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of  money. He's out of control and the Fed is out of control. We are probably going to have one of  the worst recessions we've had since the Second World War.

It's not a good scene." Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment  and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real  danger and, in fact, a probability."

Where the opportunities are.

The 1970s, of course, was when Rogers first made his reputation - and a lot of money - as  George Soros's original partner in the Quantum Fund. And despite his gloomy outlook for the  U.S., he still sees opportunities in today's world. In fact, he sees the recent correction as a  potential gift for investors who know where to head in global markets: China. Rogers has been fascinated with China ever since he rode his motorcycle across the country  two decades ago, and he's been a full-fledged China bull for several years. In December he  published his latest book, an investor-friendly tome titled "A Bull in China: How to Invest  Profitably in the World's Greatest Market." And that same month he sold his beloved  Manhattan townhouse for $15.75 million to a daughter of oil tycoon H. L. Hunt and moved his  family full-time to Singapore - the better to be closer to the action in Beijing and Shanghai.  (He bought the New York mansion 30 years ago for just over $100,000; not a bad return on  his investment.) But in a November interview I conducted with Rogers, he admitted that he was rooting for a  serious correction in China to cool off an overheating market and bring back prices to a  reasonable level.

With the bourses in Shanghai and Hong Kong both some 20% off their  recent highs as of late January, Rogers says he's starting to consider new investments.

"I'm delighted to see what's happening in Shanghai and Hong Kong," he says. "As I've said, if  things hadn't cooled off, the Chinese market was in danger of turning into a bubble. I find this  most encouraging. The government's been doing its best to try and cool things off. Mainly  they've been trying to deal with real estate but it's having an effect on stocks, too. I would  suspect the correction isn't quite over in China. But I'm gearing up. I didn't put in any orders  for tomorrow but I'm starting to prepare my list of things to buy in China. Whether I buy this  week or this month or this quarter, who knows. But I'm starting to think about buying new  shares in China for the first time in a while. And I'm not thinking about buying in America."

Ultimately, Rogers doesn't think that the troubles in the United States will be much of a drag  on the prospects for the People's Republic. "Anybody who sells to Sears (SHLD, Fortune  500) or Wal-Mart (WMT, Fortune 500) is going to be affected, without question," he says.  "Some parts of the Chinese economy are going to be untouched, however. They won't even  know America's in recession. They won't care if America falls off the face of the earth."

What's on his China buying list? Rogers says it will depend in large part on which stocks  come down to the right level, but he's keeping his eye on certain high-growth sectors  including tourism, agriculture, power generation and airlines.

The pullback in commodity prices on recession fears hasn't dampened his enthusiasm for  resources investments, either. More like a cyclical correction in the middle of a long-term bull  untouched, however. They won't evenmarket. "Certainly some commodities are going to be affected," says Rogers. "But it's not as if  the markets haven't figured this out. Remember the old expression: 'Dr. Copper is the best  economist in the world.' Well, Dr. Nickel and Dr. Zinc figured out a few months ago what I  thought I had figured out, that we were going to have a recession. Nickel is already down  50%. Other commodities may fall more. But I don't see the economics of agriculture being  much affected at all. Maybe there will be a few less cotton shirts bought. Maybe there will be  a few less tires bought. But the supply is under more duress than the demand."

Once again Rogers draws on the 1970s in his analysis. "Think about the story of gold in the  '70s," he says. "Gold went up 600%, and then it started correcting. It went down nearly every  month for two years, nearly 50% from the high point. And everybody said, 'Well, that's the end  of the gold market. It was just a fluke. It's over.' It scared everybody out. And then gold turned  around and went up 850% from that level. This is what happens in markets. But the  fundamentals of the secular bull market in commodities are not over any more now than they  were for gold in the '70s." Where he expects the pain to be most intense is on Wall Street. He says he hasn't covered  his short positions on the investment banks or Citigroup (C, Fortune 500) and won't for a  while. "Those things are going to go way, way, way down," says Rogers. "The investment  banks are down now because of the problems in the credit market.

Wait until the effects of the  bear market come along. If you just go back and look at other bear markets, investment bank  stocks have gone down enormously. We haven't gotten to that stage yet. It's going to bring  their balance sheets under duress. This is going to get much worse. But that's where there  have been excesses for the past decade or so. And whenever you have a bear market come  along the great excesses of the previous period are the ones that get cleaned out the most." He'll be watching - from Singapore.